Introduction

We would now like to use some of the urban efficiency wage models developed in Part 2 to provide some microeconomic mechanisms that explain why the spatial mismatch between where blacks (and other ethnic groups) reside and where jobs are located can have adverse labor market outcomes. Since the way the labor market operates is quite different under efficiency wages and search frictions, the mechanisms proposed here are not the same as those exposed in the previous chapter. This will also lead to different policy implications.

We will provide two main mechanisms in this chapter. First, using the model of Section 2 in Chapter 5, which assumes that workers' effort negatively depends on distance to jobs, we will show that, in equilibrium, firms draw a red line beyond which they will not hire workers. This is because, depending on their residential location, workers do not contribute to the same level of production, even though the wage cost is location-independent. As a result, the per-worker profit decreases with distance to jobs and firms stop recruiting workers residing too far away, i.e., when the per-worker profit becomes negative. This model offers an explanation for the spatial mismatch of black workers by focusing on the point of view of firms. If housing discrimination against blacks forces them to live far away from jobs, then even though firms have no prejudices, they are reluctant to hire black workers because they have a relatively lower productivity than whites.