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

workers has a negative effect on the real wage differential (the schedule is downward-sloping
for both U and 5). The competition effect is in this case stronger than the effect of the other
two agglomerative forces. For the high-skilled worker the situation is different (Fig. 2) If the
skilled manufacturing labour force concentrates in one region, these workers become more
productive and the competition effect is more than compensated by the skill premium effect.
However, migration of the low-skilled has a negative impact on the high-skilled real wage.

Finally, at low trade costs (φ = 0.60, or τ = 1.1856), the symmetric equilibrium
becomes unstable and a core-periphery structure arises.

Fig. 3 shows how the types of equilibria are related with trade costs. The shares of
manufacturing labour force in region 1, U and S, are measured on the vertical axis. Solid and
dotted lines represent respectively stable and unstable equilibria. At high trade costs, there is
a unique stable equilibrium in which skilled and unskilled workers are equally divided
between the two regions.

¹⁷ Since the two regions are perfectly symmetric we restrict the following analysis to region 1.

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