Agglomeration and regional unemployment differentials

Abstract

This paper develops a solvable general equilibrium agglomeration model, where search frictions for low-skilled immobile workers generate regional unemployment differentials. Contrary to other work in this field, the model yields a higher long-run unemployment rate in the core region. This is because low-skilled manufacturing jobs are more valuable there and unemployment works as a compensating differential. It therefore more closely resembles the classical result of Harris and Todaro (1970). One main difference is that here regions are ex ante equal. I derive expressions for the break and sustain point and analyze the effect of search frictions on their location.