Regional factor market distortions: The case of interregional wage transmission

The purpose of this study is to evaluate the effects of regional factor market distortions on the recipient region and on the rest of the economy. A two-region computable general equilibrium (CGE) model is used for the analysis. The empirical data set pertains to Virginia and rest of the United States for the benchmark year 1981. The notion of interregional wage transmission is incorporated by exogenizing the regional wage from the standpoint of the region. This wage rate is determined within the model but outside the small region. Regional unemployment is endogenized and all other factor and commodity markets are assumed to clear. The benchmark equilibrium departs from the traditional neoclassical paradigm and is modeled as a "second-best" situation. While second-best situations are often assumed implicitly in regional analysis, they have not been formally incorporated in previous regional models. The model incorporates two levels of governments. Four simulation scenarios are distinguished based on the sources of financing Virginia's wage subsidy and the export base hypothesis from the regional economics literature.;It is concluded that, if an economy is not initially at a "first best optimum," there exists the possibility that a tax-subsidy distortion under certain situations may benefit the recipient region as well as the rest of the nation. However, subsidizing a region's exporting sectors instead of all sectors may not necessarily be more beneficial to the recipient region. The implication is that supply side variables, including a region's internal cost conditions, may be as important as demand side variables in determining regional growth. A multiregional computable general equilibrium framework allows us to consider both supply side and demand side variables. In this dissertation it is demonstrated how such a framework can be a useful methodological tool to study whether the costs of compensating for regional factor market distortions through additional distortions are desirable in terms of the net gains and losses for the regional economy and for the rest of the economy.