Ferdinando Monte, Stephen Redding, Esteban Rossi-Hansberg

We provide theory and evidence that the elasticity of local employment to a labor demand shock is heterogeneous depending on the commuting openness of the local labor market. We develop a quantitative general equilibrium model that incorporates spatial linkages in goods markets (trade) and factor markets (commuting and migration). We quantify this model to match the observed gravity equation relationships for trade and commuting. We find that empirically-observed reductions in commuting costs generate welfare gains of around 3.3 percent. We provide separate evidence in support of the model's predictions using decompositions of employment changes, million dollar plants, and trade shocks.

JEL Codes
F12: Models of Trade with Imperfect Competition and Scale Economies
F14: Empirical Studies of Trade
R13: General Equilibrium and Welfare Economic Analysis of Regional Economies
R23: Urban, Rural, Regional, Real Estate, and Transportation Economics: Regional Migration; Regional Labor Markets; Population; Neighborhood Characteristics
labor supply elasticity
general equilibrium
spatial linkages