Trade and Industrial Location with Heterogeneous Labor
International Monetary Fund (IMF) - Trade Unit; University of Melbourne - Department of Economics; Centre for Economic Policy Research (CEPR)
Christopher A. Pissarides
London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA); Hong Kong University of Science & Technology (HKUST)
IMF Working Paper No. 04/103
We show in the context of a new economic geography model that when labor is heterogenous trade liberalization may lead to industrial agglomeration and interregional trade. Labor heterogeneity gives local monopoly power to firms but also introduces variations in the quality of the job match. Matches are likely to be better when there are more firms and workers in the local market, giving rise to an agglomeration force that can offset the forces against trade costs and the erosion of monopoly power. We derive analytically a robust agglomeration equilibrium and illustrate its properties with numerical simulations.
Number of Pages in PDF File: 26
Keywords: Agglomeration, matching, spatial mismatch, interregional trade
JEL Classification: F12, J41, R12, R13
Date posted: February 15, 2006
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