Spatial Equilibrium in the Labor Market

Abstract

The paper discusses two approaches to spatial equilibrium in the labor market. The more traditional approach of labor economics assumes wage differentials represent arbitrageable differences in utility, with implications 1) that migration should be toward higher wage areas and 2) that migration flows will lead to convergence in wages over space. The more recent approach of urban/regional economics follows Roback in examining the implications of assumed equilibrium in utility over space. In this view wage differentials are compensatory (along with rent differentials) for amenity variation over space. The implications for wage convergence over space are complicated, but in general there would be little inherent reason to expect convergence. This paper takes the view that falling moving costs, combined with greatly improved information about locations, renders the urban/regional approach the more relevant in recent decades. Numerous additional insights about this approach are discussed.