Regional equilibrium unemployment theory at the age of the Internet

• We develop an equilibrium matching framework with two regions.
• Job-seekers decide whether they search locally or in both regions.
• Searching more efficiently in the other region has ambiguous effects on equilibrium unemployment rates.
• The decentralized economy is inefficient for a variety of reasons.
• A numerical exercise suggests that searching locally only is efficient.

This paper studies equilibrium unemployment in a two-region economy with matching frictions, where workers and jobs are free to move and wages are bargained over. Job-seekers choose between searching locally and searching in both regions. Search-matching externalities are amplified by the latter possibility and by the fact that some workers can simultaneously receive a job offer from each region. The rest of the framework builds upon Moretti (2011). Increasing the matching effectiveness out of the region of residence has an ambiguous impact on unemployment rates. While it reduces the probability of remaining unemployed, it also decreases labor demand because of a lower acceptance rate. We characterize the optimal allocation and conclude that the Hosios condition is not sufficient to restore efficiency. A numerical exercise indicates that the loss in net output is non-negligible and rising in the matching effectiveness in the other region.