Regional Subsidies and Interregional Labor Movement
ISER DP No. 1041
31 Pages Posted: 20 Oct 2018
Date Written: September 24, 2018
When a government considers a subsidy for an underdeveloped region, it has several options: the subsidies can be for land, wages, employment, or production. While land subsidy is a lump-sum transfer, the others are meant to promote local production or worker immigration. Under full employment, replacing the lump-sum subsidy with the other subsidies benefit (harm) the recipient region if it specializes in labor-intensive (land-intensive) activities. If unemployment prevails in both the recipient and non-recipient regions, production and employment subsidies benefit, but a wage subsidy harms, the recipient region. We also analyze asymmetric cases where one region attains full employment while the other region remains underemployed.
Keywords: Transfer, Subsidies, Unemployment, Wage Rigidity
JEL Classification: F22, H71
Suggested Citation: Suggested Citation