Economic Integration, Factor Mobility, and Wage Convergence

This paper studies the effect of economic integration of two regions on the mobility of skilled and unskilled workers across regions and on the resulting location of industrial activity. In particular, we study what happens when wages in both regions are set by the unions of the "West"--the region with a greater initial relative stock of human capital. We show that under some circumstances, it is the interest of the West's unions to set up a speed of wage convergence greater than equilibrium, thus generating unemployment in the East. This slows the migration of human capital toward the East but quickens the migration of raw labor toward the West. A greater share of economic activity is eventually located in the Western region. Unions in the West will benefit from this provided human capital has low migration costs relative to raw labor