Agglomeration and fair wages

This paper implements a fair wage constraint in the fashion of Akerlof and Yellen (1990) into an analytically tractable core-periphery agglomeration model. This enables us to study the role of imperfect labour markets for the pattern of agglomeration. We illustrate that, in the short run, a marginal increase in fair wage preferences leads to an unambiguous compression of the national factor price differential which involves an increase in the unemployment rate. In the long run, this mechanism tends to render full dispersion an unstable equilibrium already at higher trade costs than in the absence of fair wage preferences, that is, than with perfect labour markets. With asymmetric fair wage constraints, industrial production tends to agglomerate in the more constrained region at intermediate trade costs. Overall, we conclude that there is a tendency for fair wage preferences to enforce agglomeration. JEL: F12, F15, F16, F21, R12