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Regional Wage and Employment Responses to Market Potential in the EU

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  • Head, Keith
  • Mayer, Thierry

Abstract

Recent theoretical work on economic geography emphasizes the interplay of transport costs and plant-level increasing returns. In these models, the spatial distribution of demand is a key determinant of economic outcomes. In one strand, it is argued that higher demand gives rise to a more than proportionate increase in production, a result known as the home market effect. Another strand emphasizes the effects of market sizes on factor prices. In this paper we highlight the theoretical connection between these two strands. We use data on 57 European regions to show how wages and employment respond to differentials in what we call real market potential, a discounted sum of demands derived from the theory.

Suggested Citation

  • Head, Keith & Mayer, Thierry, 2005. "Regional Wage and Employment Responses to Market Potential in the EU," CEPR Discussion Papers 4908, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4908
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    More about this item

    Keywords

    gravity equation; home market effects; new economic geography; wage equation;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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