Spatial equilibrium in labor markets

Abstract

Over long periods of human history, labor market equilibrium involved movements from low-wage areas to high-wage areas, a form of arbitrage under the implicit view that wage differentials corresponded to utility differentials. This “labor economics” view is likely to be viable as long as movement and information costs are high, and under this view, the movements would be expected to cause wage convergence over space. In recent decades, beginning as early as the 1960s in the United States, both the out-of-pocket and psychological costs of movement have plummeted with advances in transportation and communication technology and innovation. In addition, these same advances have enabled individual households and firms to have vastly improved information about potential benefits of locating in a host of potential locations. These observations, along with recent failures to observe convergence in wage rates, suggest that an alternative view - assuming a utility equilibrium over space - might better predict and explain the labor market equilibrium. This “urban/regional economics” view takes wages and rents as being compensatory for varying levels of household and firm amenities. In this view, whether the spatial equilibrium in labor markets involves convergence or divergence becomes quite a complicated issue. This chapter explores a number of the complexities, hinting at a broad range of potentially fruitful future research.