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



economic performance, since it affects the way the regions maintain and sustain human
resources.

The regional level of skills can be interpreted as the stock of human capital in the
economy. According to Lucas (1988) the accumulation of human capital is a source of
positive spillovers. It is reasonable to argue that workers' skills are augmented through
learning and exchange of ideas, and that workers therefore increase their productivity by
interacting with those around them. As a result, migration of a worker from a region where
the average level of human capital is low to one where the average level is high will raise his
productivity. Geographic proximity is crucial since it allows ideas to travel more rapidly, the
impact of such localised externalities weakens with distance. As proposed by Kremer (1993),
many production processes consist of multiple tasks, all of which must be successfully
completed for the product to have a full value. The matching of skilled workers in the
production process increases the probability of successfully performing those tasks. In
equilibrium, skilled workers are matched together in the core region. This assumption is
consistent with a series of stylised facts. First of all, the substantial wage and productivity
differences between rich and poor regions.

This paper aims to analyse the effect of a deepening of a regional integration process
on the incentive for labour to spatially relocate. We adopt a general equilibrium, economic-
geography model similar to Krugman (1991). We allow for skill heterogeneity in the
manufacturing sector. Two types of manufacturing workers exist in our simplified economy:
low and high-skilled, where skills are associated with the efficiency unit of labour offered in
the labour market. We assume that the former is able to supply one unit of labour. High-
skilled workers are potentially more productive than the unskilled ones. Interaction between
high-skilled manufacturing workers in a region (we assume that proximity is needed here)



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