Returns on Production Factors and Regional Heterogeneity: How Important Are the Effects of Trade and Labor Markets on Average Pay across European Regions?

By Don Webber

This paper explores the effects of trade and labor market variables on changes in relative average regional pay across Germany, Holland, Italy, and Spain over the 1986-1994 period. Using pooled cross-sectional estimations, the labor market variables of unemployment benefits and employment rates are identified as being statistically significant, while negative evidence of changes in the labor supply suggest support for the Rybczynski theorem. However, the change in relative average regional pay appears to be the result of unobserved regional heterogeneity, suggesting that regional characteristics, not trade or labor markets, essentially determine relative average regional pay.


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