Elastic labor supply, variable markups, and spatial inequalities
Hajime Takatsuka and
Dao-Zhi Zeng ()
Review of International Economics, 2018, vol. 26, issue 5, 1084-1100
Assuming an inelastic labor supply, existing studies show that a larger country has a higher wage rate and a higher individual income. We reexamine these results using a model with an endogenous labor supply and variable markups. We find that these results can be reversed. Specifically, in the larger country, the wage rate is lower but the individual income is higher if the love for variety is strong and trade costs are high. In contrast, the wage rate is higher but the individual income may be lower if the love for variety is weak and trade costs are low.
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