Seminar Papers,
Stockholm University, Institute for International Economic Studies

Abstract: We study the role of unemployment in the context of endogenous formation of a monocentric city where firms set efficiency wages to deter shirking. We first show that in equilibrium the employed locate at the vicinity of the city-center, the unemployed reside at the city-edge and firms set up in the city-center. We then establish conditions that ensure existence and uniquenes of both the labour-market equilibrium and the (monocentric) equilibrium urban configuration. Last, we perform different comparative statics analyses and derive some policy implications. We show in particular that a policy subsidizing the commuter costs of both the employed and unemployed workers reduces urban unemployment, increases utilities of all workers but raises inequality whereas a policy that subsidizes only unemployed workers' commuting costs increases urban unemployment, does not always raise workers' utilities but cuts inequality.

Keywords: Efficiency Wages; Agglomeration economies; Endogenous Location of Workers and Firms; Urban Unemployment; Subsidizing Commuting Costs

JEL-codes: J64; R14

41 pages, January 13, 1999

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