Economic Integration and Regional Income Inequalities: Competing Dynamics of Regional Wages and Innovative Capabilities

Abstract

A factor-price difference scenario has recently been used by Krugman and Venables and by Puga to explain why, in the absence of labor migrations, economic integration should first produce and then dissolve regional income inequalities. The authors question this scenario in a dynamic analysis framework that extends the Baldwin, Martin, and Ottaviano ones to allow for regional wage differences. In this context, wage flexibility is no more a sufficient condition to induce long-run convergence. Indeed, when regions are equally sized, the innovative capability advantage of the "core" outweighs the wage cost advantage of the "periphery" even for very low transport costs, and regional wage gaps are likely to persist in the long run. Copyright Blackwell Publishing Ltd 2003.

Interregional Knowledge Spillovers and Occupational Choice in a Model of Free Trade and Endogenous Growth*

“…An increase in the level of knowledge spillovers thus increases the effective high‐skill wage differential required between home and foreign for a core‐periphery to exist. This is similar to the intuition provided for unequal‐wage core‐periphery outcomes in Bellone and Maupertuis (2003) where the cost of innovation must be permanently lower in the core region.…”

“…2 2 See Grossman and Helpman (1991, ch. 8) and Bellone and Maupertuis (2003) for a discussion of the case where wages differ across regions. …”

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“…Finally, it is a question of providing countries with the best tools for establishing their own competitiveness diagnostic according to their unique position in the world's economic geography. Grossman and Helpman (1991, Chapter 8), Redding (1999), Baldwin, Martin and Ottaviano (2001), Bellone and Maupertuis (2003). 6.…”

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“…The purpose of making this assumption, which is standard in most New Economic Geography and Growth models, is to maintain the M-sector and the I-sector wages fixed at the unit value. See Bellone and Maupertuis (2003) for an analysis of the implications of removing this assumption. 8.…”