Increasing returns and spatial unemployment disparities

Abstract

Abstract. Recent trade and location theories (e.g., the “new economic geography”) deal with regional disparities in production and income, but assume full employment and are thus ill equipped to study regional unemployment disparities. The wage curve‐approach, which explicitly shows how disparities in real wages and unemployment rates are interrelated, can not endogenously explain the origin of these asymmetries. In the article we derive a theoretical model that combines these two strings in the literature. We show that a core‐periphery in real wages is associated with and magnified by regional unemployment disparities. This wage curve relation is stable over time with an increasing returns technology. That is, the wage curve does not vanish as workers move from the periphery to the core, but it is rather reinforced by migration. These theoretical predictions are consistent with stylised empirical facts from the EU.