Banque centrale du Luxembourg - Regional wages and market potential in the enlarged EU: An empirical investigation

Numéro	37
Date	April 2009
Auteur	Thomas Y. Mathä and Allison Shwachman
Résumé	This paper empirically analyses the link between market potential and regional wages in the enlarged EU. We extend previous studies of EU regions in several ways. 1) we analyze the link between market potential and wages for the EU27, 2) correct for spatial autocorrelation present in the data, showing that by neglecting spatial autocorrelation the strength of the relationship between market potential and wages may be underestimated, 3) decompose total market potential into several geographical components and analyze their respective contributions to explaining the geographical wage structure, and 4) explore which regions have gained the most from European integration by calculating counterfactual market potential if they could only trade with other regions within the same country.
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