MACRO: Heterogeneity and Hysteresis; Professor Mike Elsby (University of Edinburgh)

Abstract

We devise a tractable model of persistent heterogeneity in labor mobility. The model admits analytical solutions for household values, reallocation flows, and the distribution of mobility types across markets, a challenge posed by the environment. Central to tractability is that equilibrium mobility is ordered: markets facing adverse (favorable) shocks shrink (grow) via inflows in order of mobility type, starting with the most mobile. Cross-sectional gaps emerge not only in labor market outcomes, but also in the composition of mobility types. Convergence involves closing both gaps, and generically takes longer. Labor market outcomes display endogenous history dependence whereby markets with greater shares of mobile types exhibit greater resilience to adverse shocks. Auspicious markets are heterogeneous and feature high churn; inauspicious markets become increasingly homogeneous and sclerotic. Application of the model to spatial convergence using data on population flows dating back to the 1960s provides support for these predictions.