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

The impact of exogenous regional characteristics on the spatial variation in factor
prices is generally evaluated using hedonic price estimation technique (Roback 1982). As
Hanson (2001) points out, although empirical evidence supports the hypothesis that local
amenities contribute to explaining regional differences of factor prices, some evidence shows
that considerable differences remain even within regions with a similar endowment of
exogenous amenities.

Some theories, based on the existence of localized human capital externalities, argue
that differentials in factor remuneration may be persistent over time if regions present a
different level of human capital (see Eaton and Eckstein 1997). The main idea is that the level
of skills, education and experiences of the local labour force positively affect workers’
productivity. Interaction between skilled individual enables flows of ideas, diffusion of best
practice and, in general, the possibility to benefit from a local knowledge stock. As a
consequence, also high-skilled workers from other areas will be attracted toward regions with
higher returns to skills. Therefore, a positive self-selection of migrants (see Borjas et al.
1992) may generate a self-sustaining mechanism of growth. According to the theory the level
of local human-capital has an important role in explaining spatial differences in wages and
housing prices. Recent empirical studies have supported this prediction using micro data.
Rauch (1993) employs US Census data on wages and human capital of individuals in 237
cities in 1980 to estimate externalities in cities using individual wage-regressions. The notion
of human capital defined by Rauch contains both education and work experience
components. His results suggest that the external effect of a one-year increase in average
schooling in cities has a positive and statistically significant effect on wages of workers in the
same city of around 4%. These results hold even when he controls for the effects of other
factors such as R&D investment policies that favour cities, as well as university concentration

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