Regional Intergration and Migration: An Economic Geography Model with Hetergenous Labour Force

The price index equations (25) as noted before have an important property. The regional
manufacturing price index will tend to be lower, the higher is the share of effective
manufacturing labour in the region, since more varieties are produced locally without
incurring therefore in transport costs (price-index effect).

The total regional income Y_i is given by the sum of all farmers and workers wages

Y = Wi L₁ + (1 — μ ) / 2

^Y2 = w 2 L2 ^{+ (1 - μ} )/²
where 1-μ is the world population of immobile farmers.

Real wages are obtained by deflating nominal wages by the regional cost-of-living index
P_i^μ (PA )^{1 μ} . As the agriculture product is the numeraire, the index can be simplified to P_i^μ .
We assume that workers are paid linearly according to their level of skill si; consequently the
real wages, ( (∣'λ, (∣'λ respectively for low- and high-skilled workers) are:

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