When trade barriers fall below a critical level (φs sustain) a core-periphery
equilibrium for the high-skilled becomes possible. However, the symmetric equilibrium is
still stable for values above another critical value (φs break).18 As the regional economies
become more integrated high-skilled workers will migrate first in response to real wage
differentials.
We next consider whether there is a range of transport costs for which only the high-
skilled migrate to the core region. We compute a critical level of trade costs for which U = ½
and S = 1 (or zero) is a stable equilibrium, φ-self selection. For trade costs below these level
a core-periphery equilibrium as in Krugman (1991) is the only stable outcome. The stability
of the symmetric equilibrium for the low-skilled is affect by high-skilled workers’ migration.
The concentration of high-skilled workers in the core region will strengthen the
agglomerative forces since more varieties are produced (price-index effect) and more income
will be generated in this region (home-market effect). For sufficiently high trade costs, the
symmetric equilibrium for the low-skilled may still be stable. But as regional integration
proceeds, the stability may be reversed. A two-stage process of industry location may arise.
First, the core region (which is still relatively small) is attractive only to workers in the skill
intensive industry. Concentration of skilled workers increases productivity and firms are
willing to pay higher nominal wages. Second, as a threshold of trade costs is reached, φ-self
selection, high-skilled workers’ concentration in the core region, also induces low-skilled
workers to migrate leaving the periphery deindustrialised (the home-market and price-index
effects become stronger than the competition effect).
18 For values of trade costs within the range (φs break < φs < φs sustain), both concentration of the high skilled in
one of the two regions and symmetry are possible equilibria. The model does not predict which equilibria will
arise; policy and history have clearly a potential role in determining the outcome.
28
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