EC966: Assessment 2

Research-informed Policy Note

Student ID: 1990148

The issue discussed here, describes a spatial mismatch in the job search market. Spatial
mismatch arises when there is a gap between vacancies being posted and the positions being
filed. In this case, the costly job search for the workers living in the suburbs pertaining to
high commuting cost to the city centre where information for job vacancies are available,
creates this gap. Presence of such frictions in the market have been frequently observed and
analysed. [ CITATION Ihl97 \l 1033 ]documented the presence of spatial mismatch in
metropolitan areas in Georgia. They find evidence of poor information being available to the
inner-city residents on the distribution of spatial job opportunities.
Job search procedures are often characterized by large number of frictions which in this case
is high cost of transportation. Taking into account vacancies and the number of job seekers,
matching function links them to the number of successful matches in the market. The
matching function also encompasses frictions created due to heterogeneity in the market like
distance and information constraints. The matching function depends on the ‘tightness’ of the
labour market which is the ratio of vacancies and number of job-seekers.
The proposed policy tries to narrow the heterogeneity by providing travel subsidies to job
seekers in the suburbs. This policy change might reduce the cost of job search for job seekers.
As a result of subsidized travelling costs, more workers might get informed of the available
vacancies, reducing the gap between vacancies and unemployment. Assuming Constant
returns to scale, this will reduce the ‘tightness’ factor of the labour market. The matching
function is inversely related to the tightness indicator. As a result of subsidized travel costs
and thus a reduction in the labour market tightness, the matching function might improve
which means that the probability of a vacancy being filled might increase resulting in more
and better employer-employee matches. [ CITATION Was02 \l 1033 ]developed a model of job
search in which the job-seekers search efficiency is inversely related to the access to jobs.
The location at which the worker lives and its distance from the city centre where most
opportunities are, is considered to be endogenous and depicts a trade-off between the benefits
of job search and travelling costs. The model in this study is consistent with the basic job
search model and the theory of matching function in the job market in the city.
According to the theory of matching function, I believe that the proposed policy might solve
the city’s problem of spatial mismatch and shift the city’s Beveridge curve inwards, closer to
the origin. A model presented by [ CITATION Fra18 \l 1033 ]implies that a risk-averse
individual, with some initial savings will look for a job only if their savings exceed a
threshold value. This is because looking for job is costly and the individual might not benefit
from job search if the costs are too high. The model implies that reducing the cost of job
search for example by subsidising travel expenses, will reduce the threshold value of savings
above which the unemployed individual will look for job. This theory is consistent with the
hypothesis that reducing cost of job search will improve the matching function. Thus, this
theory reiterates the benefits of providing travel subsidies to the job-seekers in reducing the
labour market tightness in the case of the capital city of this low-income developing country.
[ CITATION Fra18 \l 1033 ]also provides experimental evidence to support their model. A
group of randomly selected unemployed people living in dislocated areas of Addis Ababa in
Ethiopia are provided with some temporary and non-fungible subsidies for transport (much
like the suggested policy). The labour success of job matching is observed between the
control and treatment groups. Consistent with the model, the author finds that the individuals
who received the subsidies, indeed spent more time looking for a job and are more likely to
have found a permanent job.
I think the policy change suggested by the team would be beneficial in reducing the mismatch
in the market. Evidence from the exogeneous variation in the rail system in San Francisco
Bay Area that improved the accessibility to a suburban city centre (where most of the job
opportunities were posted) to the inner-circle minority, suggests that this improvement led to
a reduction in the transit cost thus making job search less costly. [ CITATION Hol03 \l
1033 ],use two-way longitudinal survey after the policy implementation and observe that the
public transit policy did help improve the employment opportunities available to the
minorities in the area by reducing the job search costs and making it more accessible for them
to travel to the employment centres.
Drawing from experimental evidence from another randomised trial conducted by [ CITATION
Phi14 \l 1033 ] in the regions of urban United states that are home to many minority, poor
individuals with very less employment opportunities, it can be seen that, when the low-wage
minority job-seekers are provided with transit subsidies, experience a large increase in their
search intensity with the largest effect being on those who live the farthest away from the
opportunity centres. Thus, subsidising the travel cost might not only be beneficial in reducing
the spatial mismatch but it might also improve employment and matching of the minority
group. Although there is enough experimental and empirical evidence to suggest that
introducing travel subsidies for job seekers might be a good idea, results obtained by most
studies including [ CITATION Phi14 \l 1033 ]and [ CITATION Fra18 \l 1033 ]were observed
only in the short run. In the long run the subsidies ware off and so do their effects.
While subsidising the travelling costs might be beneficial, it must be used cautiously if direct
monetary transfers are made. If the incentives provided are very large, there will be a
considerable increase in the instantaneous income of the individual which might have a
negative impact on the search effort under the job search theory. The best way for the mayor
to ensure effectiveness of the policy is to provide durable but depletable subsidies like rail or
bus pass.

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Bibliography
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