Economic Geography And Regional Wage Differentials: Evidence From The Prefecture-level Cities In China

Different from Neo-classical Economic Theory, the paper estimates a model of economic geography using the data of 1997 China's inter-regional input-output tables, to explain the formation mechanism of the income disparities. We use the trade gravity model to calculate the correlation between the demands and transport costs of different areas, in order to form the market access of China's 216 prefecture-level cities in use of the methods of Redding and Venables (2004), which is the basic and core variable of this paper to describe the real market potential of a region.After we get this basic variable, the next step is to explain the wage disparities with the variable in use of the classic "wage equation" of the new economic geography to find out if there is a significant correlation between the wage and market access. In this part, we will take series of methods to solve the problems of endogeneity and stability in the regression, such as using of time lag and instrument variables, so that the conclusions of the article will be more convincing.According to the data processing and results of regression, we find that, 1 )The segmentation of domestic market is not so serious as traditional academic thoughts;2)Market access varies greatly of the cities, from the highest Shanghai of 0.767 to lowest Heihe of 0.0173;3)The elasticity coefficients of wage to market access is 15-20% ,that is to say when a market access in the city is increased by one time, the average wage in the region will increase 15 percent to 20 percentBased on these findings, to the formation mechanism of regional income disparities in the perspective of new economic geography theory, we can conclude that, there is a significant positive correlation between the regional income and market access, that is, the difference between market access will lead to differences in the level of incomes.Derived from this conclusion, the paper puts forward to the following policy implications: 1) To continue to promote the infrastructure constructions in order to reduce inter-regional transport costs and improve market access for the middle and western regions;2) To release the constitutional shackles of labor mobility, and create conditions for industry agglomeration in some central cities such as Chongqing, Chengdu, Wuhan etc.