The Aggregate and Distributional Effects of Spatial Frictions; Tomasso Porzio (Columbia Business School)

Abstract

We develop a general equilibrium model of frictional labor reallocation across firms and regions and use it to quantify the aggregate and distributional effects of spatial frictions in Germany. The model is designed to leverage matched employer-employee data to isolate barriers that specifically distort the spatial allocation of labor from general labor market frictions, and to unpack these barriers into different types. We distinguish search frictions, which limit the ability of workers to obtain job offers from further away regions, from mobility costs and home bias, which limit workers’ willingness to accept offers. We estimate the model, focusing on the persistent East-West Germany divide. We find sizable spatial barriers, especially due to search frictions. Removing these barriers, shrinks dramatically the wage gap across workers’ types, as East-born workers become more likely to move to the West; however, it has only a moderate effect on the regional wage gap between East and West, and a small effect on aggregate productivity.

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