where the parameter λ measures the strength of human capital externalities. Such
externalities are increasing in the quota of high-skilled workers but at a decreasing rate.
Given ∂ ' si ∕<∂Si = λ(Si )λ 1 > 0, and ∂ '' si ∕∂Si = λ(λ -1)(Si )λ 2 < 0, it follows that 0 < λ < 1.
The fact that high skilled are more efficient in providing unit of labour according to a skill
premium si, is reflected in the following relation between low/high skilled competitive wages
in each location:
ws = wi (1 + si )
(11)
where ws and wi, represent respectively the worker nominal wages of high-skilled and low-
skilled in region i. In this formulation of the model we have no explicit reference to a quality
(vertical) differentiation of the manufacturing sector products. In a similar work Mori and
Turrini (2000) assume that skilled workers add “quality” to each unit of products. They
consider therefore product differentiation to have both a horizontal dimension (variety), and a
vertical one (quality).
It is useful to distinguish between the world population of manufacturing workers and
the world total supply of effective units of labour. The two measures are not identical since
the geographical distribution of skilled workers (the human capital level in each region) is
going to affect the total number of units of labour supplied. Total units of effective labour in
one region are given by:
L1= Ui+ ( S.)1+λ
(12)
14