Economic Integration and Regional Income Inequalities: Competing Dynamics of Regional Wages and Innovative Capabilities

A factor-price difference scenario has recently been used by Krugman and Venables and by Puga to explain why, in the absence of labor migrations, economic integration should first produce and then dissolve regional income inequalities. The authors question this scenario in a dynamic analysis framework that extends the Baldwin, Martin, and Ottaviano ones to allow for regional wage differences. In this context, wage flexibility is no more a sufficient condition to induce long-run convergence. Indeed, when regions are equally sized, the innovative capability advantage of the "core" outweighs the wage cost advantage of the "periphery" even for very low transport costs, and regional wage gaps are likely to persist in the long run. Copyright Blackwell Publishing Ltd 2003.