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Firms' location decision across asymmetric countries and employment inequality

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This paper analyzes the effect of globalization (lower trade costs) on production and trade patterns if, firms are vertically linked, stages of production differ in labor-factors intensity and countries differ in labor-factors prices. In order to reflect the European experience, relative wages are assumed to be fixed and spatial changes in production are translated into changes in relative (skilled to unskilled) employment levels. This paper hence extends the new economic geography literature by allowing countries to differ and by introducing several factors of production. Intermediate trade costs may entail agglomeration in either country. The agglomeration equilibrium is unique for a broad range of trade costs. At low trade costs, firms location depends on production costs - vertical specialization occurs. Vertical specialization increases employment inequality in the high-unskilled wage country, whereas agglomeration may increase employment inequality simultaneously in the two countries.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2003/2003-60.pdf

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