Local neighborhoods and labor market outcomes: Theory, evidence, and empirical implications

The purpose of this research was to examine whether the distribution of labor market information varies by location, and, if so, what implications this distribution had on labor market outcomes. A spatial distribution is of interest because neighborhood contacts and family are an important source of labor market information. Those searchers with more informed contacts are expected to find better job matches for themselves and, thus, attain better wages. A comparative statics model is developed where the job searcher is modeled as a job match producer. Environmental characteristics alter the cost of search. The main result of the model is that neighborhood effects do exist under a given set of conditions. Empirical studies that do not take into account of these conditions will either fail to identify or falsely identify the effect of neighborhood qualities on labor market operation. Two sets of data were used for this research. The first part of the empirical analysis relies on the Panel Study of Income Dynamics, geo-coded and merged with Census data. The empirical analysis of aggregate labor market results relies on Japanese data collect by the author from published government sources. The following hypotheses were tested. The first hypothesis states that information does vary by location. Second, that competitive advantages in information access does yield better labor market outcomes as measured by the wage attained. Third, neighborhood characteristics alter the cost of collecting labor market information and thus affect labor market outcomes. Finally, at a macroeconomic level of analysis, the dispersion of the earnings distribution is hypothesized to increase as information connectivity increases. All of the hypotheses were confirmed. Job match quality does vary by location. In addition, locations with heterogeneous populations and high unemployment had higher search costs and obtained lower match qualities. Moreover, the empirical analysis found interaction effects between human capital and neighborhood qualities. In the macroeconomic analysis, it was also found that the earnings distribution became flatter as information connectivity increased. These impacts were significant for both rural and urban areas.