Skills, agglomeration and segmentation

Abstract

We investigate the role of skill heterogeneity in explaining location patterns induced by pecuniary externalities (Krugman [30]). In our setting, sellers with higher skills better perform in the marketplace, and their sales are larger. Selling to distant locations leads to lower sales because of both (pecuniary) transport costs and communication costs that reduce the perceived quality of goods. A symmetry-breaking result is obtained: symmetric configurations cannot be stable, and regional inequality is inevitable. The relatively more skilled choose to stay in the location with higher aggregate income and skill, while the relatively less skilled in the other. The model allows us to analyze the links between the extent of interregional inequality and the extent of interpersonal skill inequality.Keywords: Skill heterogeneity; Agglomeration; Core-periphery model; Regional inequality; Interpersonal inequality; Transport and communication costs.JEL ClassiÞcation: R12, R13, F12, F16.Acknowledgments: We thank Richard Arnott, Duncan Black, Pierre-Philippe Combes, Gilles Duranton, Masa Fujita, Tatsuo Hatta, Gianmarco Ottaviano, Diego Puga, Akihisa Shibata, Tony Smith, Takaaki Takahashi and participants of the seminars/conferences for their constructive comments and encouragement. A part of the research was conducted while we were visiting CORE, Université catholique de Louvain, Belgium, where we beneÞted from the stimulating discussions with Jacques Thisse.

Heterogeneous skills and homogeneous land: segmentation and agglomeration

“…These costs lead high-skilled and low-skilled workers to make different location choices. Although Mori and Turrini's (2005) mechanism and the mechanism introduced in this paper both induce segmentation and agglomeration, it is the latter that is related to the very basic forces in spatial economics already highlighted by von Thünen (1826). Furthermore, we demonstrate that skill heterogeneity combined with market-size based agglomeration forces cause agglomeration of economic activities despite competition for land.…”

“…Since individual skills account for a substantial fraction of spatial wage differences, sorting by skills matters. A disproportionately large fraction of well-educated workers live and work in large metropolitan areas (Mori and Turrini, 2005).…”

“…An exception is Mori and Turrini (2005) who showed that skill heterogeneity within a standard new economic geography framework causes spatial sorting and agglomeration whereas trade integration as a supplementary force increases the degree of agglomeration. More theoretical work on skill heterogeneity needs to be done to take into account the full spectrum of market forces analyzed within the new economic geography framework.…”

“…In their analysis of skill heterogeneity, Mori and Turrini (2005) neglected land use in production and housing, as well as commuting costs. Although von Thünen (1826) early on highlighted the role of land as a main force behind dispersion, the new economic geography literature initially omitted land use from analysis.…”

“…However, except when the income elasticity of demand for land is too high, preferred wages accompany skills. Mori and Turrini (2005) also established segmentation and agglomeration in a regional model with skill heterogeneity, 6 but in their model, where differentiated worker-sellers produce consumer goods, land is absent. Communication costs associated with interregional trade that fall more heavily on low-skill suppliers are the driving force behind segmentation.…”