The Incidence of Local Labor Demand Shocks

Low-skill workers are comparatively immobile. When labor demand slumps in a city, college-educated workers tend to relocate whereas non-college workers are disproportionately likely to remain to face declining wages and employment. A standard explanation of these facts is that mobility is more costly for low-skill workers. This paper proposes and tests an alternative explanation, which is that the incidence of adverse shocks is borne in large part by (falling) real estate rental prices and (rising) social transfers. These factors reduce the real cost of living di¤erentially for low-income workers and thus compensate them, in part or in full, for declining labor demand. I develop a spatial equilibrium model which, appropriately parameterized, identi…es both the magnitude of unobserved mobility costs by skill and the shape of the local housing supply curve. Nonlinear reduced form estimates using U.S. Census data document that positive labor demand shocks increase population more than negative shocks reduce population, that this asymmetry is larger for low-skill workers, and that such an asymmetry is absent for wages, housing values, and rental prices. Estimates of the full model using a nonlinear, simultaneous equations GMM estimator suggest that (1) the asymmetric population response is primarily accounted for by an asymmetric housing supply curve, (2) the di¤erential migration response by skill is primarily accounted for by transfer payments, and (3) estimated mobility costs are at most modest and are comparable for high-skill and low-skill workers, suggesting that the primary explanation for the comparative immobility of low-skilled workers is not higher mobility costs per se, but rather a lower incidence of adverse labor demand shocks. Keywords: local labor markets, spatial arbitrage, durable housing, social transfers. JEL Classi…cation: J61. This is a draft of my job market paper; the latest version can always be found at the following URL: http://web.mit.edu/noto/www/noto_JMP.pdf. I am grateful to Daron Acemoglu, David Autor, and Amy Finkelstein for their guidance and support. I also thank Leila Agha, Josh Angrist, Fernando Duarte, Tal Gross, Cynthia Kinnan, Jean-Paul L’Huillier, Amanda Pallais, Jim Poterba, Michael Powell, Nirupama Rao, Bill Wheaton and participants at the MIT Labor and Public Economics Seminar for helpful comments. I gratefully acknowledge the National Institute of Aging (NIA grant number T32-AG000186) and the MIT Shultz Fund for …nancial support.