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CEP discussion paper
Trade and Industrial Location with Heterogeneous Labor
Mary Amiti and Christopher A. Pissarides
August 2002
Paper No' CEPDP0541:
Full Paper (pdf)

JEL Classification: F12;J41;R12;R13

Tags: agglomeration; matching; spatial mismatch; inter-regional trade

We show in the framework of a new economic geography model that when labor is heterogenous and productivity depends on the quality of the match between job and worker, trade liberalization may lead to industrial agglomeration and inter-industry trade. The agglomeration force is the improvement in the quality of matches when firms recruit from a bigger pool of labor. The forces against agglomeration are the existence of trade costs and monopoly power in the labor market. We show that more heterogeneity in skills attracts both firms and workers to bigger markets and supports agglomeration at higher trade costs.