Local labor markets in a new economic geography model
Abstract
Space economy is determined by the interaction between markets and the mobility of production factors. Capital and labor mobility affects the functioning of the product and labor markets in the regions of origin and destination. This feeds back into the earnings of production factor owners and changes the incentives to move through the modification of demand levels in both regions. In this paper, we build a model with two regions and two production factors, labor and capital, à la Tabuchi-Helpman in order to embody both capital and labor mobility in a unique model. Considering the conditions for agglomeration and dispersion to arise, we show that the features of the labor market are a key parameter along with well-known trade costs. The results show that, depending on labor market conditions, the industry and the population display a smooth bell-shaped curve of spatial development. Dispersion prevails when trade costs are either high or low, while agglomeration occurs in between. Market integration and factor mobility exacerbate regional disparities. © Southern Regional Science Association 2016.