Are There Border Effects in the EU Wage Function?

We estimate a linear approximation of the market potential function for Europe as derived in geography and trade models. Using a spatial econometric estimation approach, border effects are identified by a differential impact of other regions’ purchasing power, depending on whether two regions are located within the EU15 or outside the EU15. We find that intra-EU15 borders have an insignificant but EU15 external borders a significant effect on regional wage structures. We also illustrate the magnitude of EU external border effects. Our results imply that border effects are most pronounced for border regions of new member states, but relatively small for most regions of the EU15.