Urban unemployment, agglomeration and transportation policies

We study the role of unemployment in the context of the endogeneous formati on of a monocentric city in which firms set efficiency wages to deter shirk ing. We first show that, in equilibrium, the employed locate at the vicinit y of the city-center, the unemployed reside at the city-edge and firms set up in the city-center. We then show that there is a 'spatial mismatch' betw een location and jobs because the further away from jobs the unemployed, th e larger the level of unemployment, Finally, we derive some policy implicat ions. We show that a policy that improves the city transportation network ( by subsidizing the commuting costs of all workers) reduces urban unemployme nt, increases utilities of all workers but raises inequality whereas a poli cy that supports the transportation of the unemployed only (by subsidizing their commuting costs) increases urban unemployment, does not always raise workers' utilities but reduces inequality. (C) 2000 Elsevier Science S.A. A ll rights reserved.