Regional factor specificity,wage differential and resource allocation

We developed a two-region, rigid-wage model incorporating features of a region-specific factor (in addition to the primary inputs) and an inter-regional wage differential. While full employment of capital is always maintained, labor, however, is subject to unemployment in both regions because of wage rigidity. The model was deployed to examine the effects of a change in the specific factor and a non-specific factor on regional resource allocation, output production and total employment. It is demonstrated that an increase in the factor specific to region 1 will result in a reallocation of resources from the second region to the first region and a decrease in the capital rentals in both regions. Thus, the output production will expand in region 1 at the expense of that in region 2. However, total employment in the nation may increase or decrease depending on whether or not the production in the second region is relatively capital intensive.