Spatial Wage Gaps in Frictional Labor Markets

Abstract

We develop a job ladder model with labor reallocation across firms and regions, and estimate it on matched employer-employee data to study the large and persistent real wage gap between East and West Germany. We find that the wage gap is mostly due to firms paying higher wages per efficiency unit in West Germany and quantify a rich set of frictions preventing worker reallocation across space and across firms. We find that three spatial barriers impede East Germans' ability to migrate West: migration costs, a preference to live in the East, and fewer job opportunities received from the West. The estimated model highlights that the spatial barriers needed to generate the large wage gap between East and West are small relative to the frictions preventing the reallocation of labor across firms. Therefore, policies that directly promote regional integration lead to smaller aggregate benefits than equally costly hiring subsidies within region. * The views and opinions expressed in this work do not necessarily represent the views of the Federal Reserve Bank of New York. This study uses the weakly anonymous Establishment History Panel (Years 1975(Years -2014 and the Linked-Employer-Employee Data (LIAB) Longitudinal Model 1993-2014 (LIAB LM 9314).

Credit Supply, Firms, and Earnings Inequality

“…7 See Postel-Vinay and Robin (2002), Cahuc et al (2006), Meghir et al (2015), Hornstein et al (2011), Engbom and Moser (2018), Bagger and Lentz (2018), and Heise and Porzio (2019) for recent examples. and more so to managers.…”

How to improve the quality of life in peripheral and lagging regions by policy measures? Examining the effects of two different policies in Germany

“…Hence, migration numbers are rather small compared to the dimension of spatial inequalities. Heise and Porzio (2019) describe this as the "homebias" of migration, which makes migration decisions inertial and less rational than stated above and supports the persistence of spatial inequalities. Therefore, individual migration decisions have to be provoked by changes in the personal environment that raise the perceived inequalities above a subjective threshold level.…”

“…Maintenance of public infrastructure is a serious problem in many regions that are challenged by demographic change and outward migration. In line with the strong impact of the "home-bias" (Heise & Porzio, 2019), it seems reasonable that additional supply of local amenities and public infrastructure increases the number of "stayers" especially in those regions and offsets lower income opportunities to a certain point. Moreover, education infrastructure is a key settlement factor for families and high-potentials determining future earning poten- Structural funds, such as GRW, are designed to reduce the productivity gap between economically prosperous and lagging regions and provide incentives for firms and their employees to locate in regions with lower productivity (Kline & Moretti, 2014).…”

The Role of Unemployment and Job Change When Estimating the Returns to Migration

“…Furthermore, Hunt (2006) shows that job loss is a driver of migration. Heise/Porzio (2019) find that earnings of Eastborn migrants to West Germany increase compared to job changers within East Germany. They explain the low migration to West Germany by labor market frictions and a home bias of East Germans.…”