Spatial Equilibrium with Unemployment and Wage Bargaining: Theory and Estimation∗

In this paper we present a spatial equilibrium model where search frictions hinder the immediate reallocation of workers both within and across local labour markets. Because of the frictions, firms and workers find themselves in bilateral monopoly positions when determining wages. Although workers are not at each instant perfectly mobile across cities, in the baseline model we assume that workers flows are sufficient to equate expected utility across markets. We use the model to explore the joint determination of wages, unemployment, house prices and city size (or migration). A key role of the model is to clarify conditions under this type of spatial equilibrium setup can be estimated. We then use U.S. data over the period 19702007 to explore the fit of model and it quantitative properties of the model. Our main goal is to highlight forces that influence spatial equilibria at 10 year intervals. ∗We thank ... helpful comments and suggestions. †University of British Columbia, and NBER ‡University of British Columbia and Research Fellow, IFS, London §York University.