Inter‐ and intraregional inequality in a spatial economy

Abstract In this paper, we develop a three‐region economic geography model with workers of heterogeneous skills and mobility rates to consider how first‐nature, regional differences impact both inter‐ and intraregional inequality. In our model, the skill premium within a region summarizes both the degree of intraregional inequality between mobile, skilled workers and immobile, unskilled workers and the interregional inequality through differences in the welfare of unskilled workers across regions. Regions with the highest skill premium have the greatest degree of intraregional inequality and provide the lowest level of welfare to unskilled workers, relative to other regions. We find that the skill premium will be higher in regions with a greater supply of unskilled labor, lower supply of housing, or are more remote. An increase in a region's housing supply or centrality will lower intraregional inequality and raise the welfare of the local, unskilled workforce. However, the magnitude of these changes are declining in the initial number of skilled workers in the region. The model is extended to consider imperfectly elastic housing supply. The larger the price elasticity of housing, the larger the range of values, such that more populated regions will host a disproportionate share of skilled workers, have lower levels of intraregional inequality, and provide higher levels of welfare for unskilled workers.