The Wage Curve and Agglomeration

New Economic Geography models usually abstract from unemployment. By contrast, wage curve models (Blanchflower and Oswald, 1994) imply a negative correlation between regional unemployment and wages, but fail to account for agglomeration effects. Relying upon some stylised facts concerning the EU-15 regions a theoretical model is built combining a wage curve with an increasing returns technology. Large ‘core’ regions turn out having both higher equilibrium wages and lower unemployment rates than peripheral regions. Regional disparities can develop endogenously and labour mobility does not negate the wage curve mechanism, but rather strengthens it.