Increasing returns and spatial unemployment disparities

Standard models of the new trade and location theories usually assume full employment and are thus ill-equipped to study spatial unemployment differences, which in reality are more pronounced that income disparities. Regional labour market theories like the ´wage curve´-approach on the other hand can not endogenously explain the origin of regional economic disparities. We analyse regional agglomeration and regional unemployment in an unified approach by combining a wage curve with an increasing returns technology. We find that regional unemployment rates closely resemble the coreperiphery structure of regional GDP per capita. This matches the stylised facts from EU-15.