A Lucas island model to analyse labour movement choice between cities based on personal characteristics

This paper develops a Lucas-Prescott style island model to analyze heterogeneous agents' location choices, considering endogenous technology growth and its impact on human capital. The model predicts a U-shaped relationship between wage income inequality and technology levels across cities but an ambiguous relationship for total income. An extended two-goods model incorporates non-tradable goods prices, amplifying the model's implications. Empirical analysis using US census data supports the model, showing skilled workers with less wealth prefer large cities for higher salaries, while less-skilled but wealthier individuals favor cities with better environments, driving up non-tradable goods prices in those areas.

Tiange Qi, Yuning Gao, Yongjian Huang