Workings of a city: location, education, and production

We model the links between residential choice, education, and productivity in a city composed of several communities. Local complementarities in human capital investment induce occupational segregation, although efficiency may require identical communities. Even when some asymmetry is optimal, equilibrium segregation can cause entire “ghettos” to drop out of the labor force. Underemployment is more extensive, the easier it is for high-skill workers to isolate themselves from others. When perfect segregation is feasible, individual incentives to pursue it are self-defeating and lead instead to a collapse of the productive sector.