Commuting, Migration and Local Employment Elasticities

October 2016
Ferdinando Monte, Stephen J. Redding, Esteban Rossi-Hansberg

Many changes to the economic environment are local, including policy changes and infrastructure investments. The effect of these changes depends crucially on the ability of factors to move in response. Therefore a key object of interest is the elasticity of local employment with respect to the change in the local environment. To understand the determinants of this elasticity, we develop a quantitative general equilibrium model that incorporates spatial linkages between locations in goods markets (trade) and factor markets (commuting and migration). We show that local employment elasticities differ substantially across U.S. counties and commuting zones (CZs) in ways that are not well explained by standard empirical controls. We propose a simple summary statistic based on the share of residents who work locally that goes a long way towards explaining this heterogeneity. Using a natural experiment from the location of million dollar plants (MDPs), we find strong evidence of heterogeneous local
employment elasticities that take exactly the form predicted by our model.