Abstract

A simple equilibrium model of sectoral reallocation is developed in order to study the impact of heterogeneous moving costs on unemployment. The model blends key elements of standard sectoral reallocation theory and the competitive search model. Heterogeneity in moving costs is introduced via mobile and immobile workers. The impact of mobile workers on the unemployment rates of mobile and immobile workers is of particular interest. The model shows that the share of mobile workers raises their unemployment rate. The model also shows that when labor mobility is driven by a sectoral level aggregate disturbance, mobile workers can have a non-monotonic, but globally negative impact on the unemployment rate of immobile workers. However, when labor mobility is driven by an idiosyncratic sector-worker match effect, the share of mobile workers raises the unemployment rate of immobile workers.