The Effect of Rents on Wages when Labour is Mobile Across Regions

We develop a two-region (Dublin and rest of Ireland) search-and-matching model where unemployed can choose in which of the two regions to search, but where moving to a particular region also implies paying a region-specific... [ view full abstract ]

We develop a two-region (Dublin and rest of Ireland) search-and-matching model where unemployed can choose in which of the two regions to search, but where moving to a particular region also implies paying a region-specific rent. We find that both under Nash bargaining for wages and the sharing rule based on labour productivity a regional rent increase raises negotiated wages in all regions, which is consistent with the anecdotal evidence that rents play an important role in wage negotiations in Ireland. Moreover, a regional productivity shock pushes rents and house prices in different direction than a regional rent shock, which gives a theoretical foundation for distinguishing regional productivity shocks from regional rent shocks in empirical work.