DP3366 Trade and Industrial Location with Heterogenous Labour

Author(s): Mary Amiti , Christopher Pissarides

Publication Date: May 2002

Keyword(s): agglomeration , matching , spacial mismatch , inter-regional trade

JEL(s): F12 , J41 , R12 , R13

Programme Areas: International Trade and Regional Economics , Labour Economics

Link to this Page: www.cepr.org/pubs/dps/DP3366.asp

We show in the framework of a new economic geography model that when labour is heterogenous and productivity depends on the quality of the match between job and worker, trade liberalization may lead to industrial agglomeration and inter-industry trade. The agglomeration force is the improvement in the quality of matches when firms recruit from a bigger pool of labour. The forces against agglomeration are the existence of trade costs and monopoly power in the labour market. We show that more heterogeneity in skills attracts both firms and workers to bigger markets and supports agglomeration at higher trade costs.