Integration, Agglomeration, and Costly Adjustment of Labor

How large are the welfare e¤ects of EU enlargement and to what extent are skilled workers a¤ected di¤erently than unskilled workers in each region? In this paper, imperfect labor mobility is modeled within an economic geography framework to examine the welfare implications of goods and factor market integration. While unskilled workers are immobile, forward-looking skilled workers have the option to relocate, which involves an adjustment cost with a common and an idiosyncratic component. Consequently, steady-state properties depend on the distribution of these costs. Furthermore, trade liberalization does not necessarily harm the periphery. JEL Codes: F16, R13 Keywords: integration, agglomeration, adjustment costs Address: Bureau of Labor Statistics, Postal Square Building Rm 3105, 2 Massachusetts Avenue NE, Washington, DC 20212-0001 USA. Email: [email protected]. Phone: +1 202 691 6596. Fax: +1 202 691 6583. The author would like to thank Robert Staiger for invaluable guidance and encouragement. She would also like to thank Charles Engel, Robert Baldwin, Richard Baldwin, and Rodolfo Manuelli for useful discussions, as well as Meredith Crowley, Ted To, Paul Sullivan, Chia-Hui Lu, Alan Spearot, Matthew Kim, Tanapong Potipiti, and Federico Diez. All opinions, …ndings, conclusions, or recommendations expressed in this article are those of the author and do not necessarily represent the views of the Bureau of Labor Statistics or the United States Government. Any remaining errors are the author’s only.