Labor market frictions, agglomeration, and regional unemployment disparities

Abstract

This paper constructs a footloose entrepreneur model with Diamond–Mortensen–Pissarides job search and matching frictions in the manufacturing sector. It captures unemployment adjustment both within the manufacturing sector and in the regional labor market. The within-sector unemployment rate is negatively affected by firm market access and is positively related to the intensity of firm screening among heterogeneous candidate workers. The regional unemployment rate, on the other hand, is related to the sectoral share of job searching across sectors within each region. We find the coexistence of a smaller within-sector unemployment rate and a larger local unemployment rate in the region with firm agglomeration. We also extend the analysis by examining the role of labor market frictions across sectors and the interdependence between agglomeration and unemployment.