Firm Locations Affect Demographics

Published Date: 02 Nov 2017

Labor migration motives: a significant gap in regions' nominal wages drives young workers to migrate to the region with higher nominal wages. This is because many young workers see emigration to another region for significantly higher wages, much of which they will save for retirement, as old age insurance. This assumption greatly increases traceability via the model. As new economic geography models cannot have a closed form solution, they must resort to computer simulation. The young worker generation's caring only about nominal wages cuts the cost-of-living effect. Cutting the cost-of-living effect simplifies the model and improves its traceability.

Two-period utility maximization and CES preferences: Everyone, whether or not s/he emigrates to work for higher nominal wages in another region, faces a two-period consumption choice and has a CES preference over differentiated products. During the dynamic working period, s/he will choose where to work and how to spend money. During the static consumption, retirement period, s/he will choose only how to spend money. The CES preference, which drives firm agglomeration, explains consumers' search for product variety.

Monopolistic competition and increasing returns to scale: in monopolistic competition, firms compete and produce subject to increasing returns to scale. Under a fixed, required output (or production) volume, a firm has a one-to-one (or equally fixed?) relationship with its labor input. This assumption makes firms want to move to regions with better economies of scale.

Trade cost: Trade between regions is subject to iceberg cost. Iceberg cost is a way of noting that increasing volumes of amount goods 'melt' (or disappear in transition?) (or are stolen or damaged as transport distances lengthen?) (or find that as transport distance lengthen, increasing transport costs erode the normal profit that those goods would fetch in too distant markets?). [Choose one or more or clarify your meaning.] Iceberg cost motivates firms to engage in

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so-called 'mill pricing' or selling to all at the mill price, then charging buyers for any added transport cost. One reason firms locate in bigger markets is to avoid trade (transport?) cost

The above assumptions, which drive the model's main results, present some key features

Key Features :

Age demographics affect firm locations: Demographic distribution shapes aggregate demand and factor returns relative to nominal wage rates and so decide firms' locational choices. Therefore, demographic distribution affects firms' decisions on where to locate.

Firm locations affect demographics: more firms locating in a region induce higher wages, which attract more young labor, changing the distribution of young population.

Home market effect and home market magnification: if we define agglomeration as 'the tendency of spatially concentrated economic activity to create forces that encourage further spatial concentration of economic activity' as XXX, then this model presents that agglomeration force. As shown in (14) an increase in regional expenditure induces more than proportional increase in regional production. Thus regional concentration of firms leads more firms to locate in the same region (home market effect) and the reduction of trade frictions only magnify this agglomeration (i.e., concentration of firms in a region, magnifies home market effect).

Demand-linked, circular causality: in this model, agglomeration is self reinforcing. This is called 'demand-linked, circular causality' (Krugman XXX), which states when expenditure shifts to a region, it leads to shifting production capacity to that region, and such production capacity-shifting further encourages expenditure-shifting. Pursuing a different cause-effect relationship,(Is it different or did I misread the meaning?) a standard new economic geography model (the CP model, for example), that shifting production lowers cost of living which encourages further (emigration or immigration?) [you should choose one or the other. Migration is just simple moving. The reader has no idea whether the migrants are coming or going]. This model cuts cost-linked causality (How it cut cost-linked causality if lower living costs attract them to move where living costs are lower, or am I confused?). This is because when young labor sees emigration to a region of higher nominal wages as a way to insure

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their retirement years' spending. Wanting to maximize current savings, they care only about nominal wages, not real wages. A falling price index in the (employment region?) (home region?) [choose one] does not sway young labor's decision to work in a region of higher nominal wages.

Endogenous Asymmetry and Core Periphery Structure: In contrast with old trade theory, which predicts a more symmetric outcome after a trade-cost reduction (Baldwin, Forslid & Martin 2005), a new economic geography model suggests that a trade-cost reduction makes symmetric regions become asymmetric. In particular, when trade freeness goes beyond a break point, all firms and young labor agglomerate in one region. Moreover, although the model does not address transitional dynamics, it can explain why some regions have (mainly?) (only?) [choose one] older residents. In moving from symmetric equilibrium to core-periphery equilibrium, one region gains and another region loses young working population. The core region ends up with all the firms and young labor, leaving the periphery region no firms and only senior residents.

Even distribution of old population and Catastrophic Agglomeration: when there is even distribution of old population and when trade openness goes beyond the critical value, the model predicts sudden, massive agglomeration.

[The preceding and following paragraphs seem to say the same thing, but on closer reading may not. Are they as distinct as you would like?]

Uneven distribution of old population and Near Catastrophic Agglomeration: when age demographics are asymmetric and transportation cost nears the break point, agglomeration is sudden.

Labor-import and -export regions: when all regions' transportation costs are the same and increase only by the same amount per distance hauled, a region with a higher old-to-young ratio will import labor, while the region with a higher young-to-old ratio will export labor, eventually becoming a region of only old inhabitants.

4.0 Conclusion

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