A labor market model is developed within an urban spatial context, where it is shown that efficiency-wage policies can lead to significant levels of involuntary unemployment. Commuting cost differences between workers and nonworkers tend to increase unemployment, and competition for land tends to segregate workers and nonworkers, with nonworkers relegated to the urban fringe. These findings are extended to a two-city system, where it is shown that even with free mobility of workers, significant wage and unemployment differentials can exist between cities characterized by different levels of productivity.
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Citation
Zenou, Yves and Smith, Tony E. (1995) Efficiency wages, involuntary unemployment and urban spatial structure. (In: Recent Advances in Urban Economics and Land Use: a Special Issue in Honour of Hiroyuki Yamada) Regional Science and Urban Economics, 25, (4), pp. 547-573. (doi:10.1016/0166-0462(95)02100-9).
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