CREB - Center for Research in Economics and Business

Relative Wage Variation and Industry Location within Districts of Punjab
Zunia Saif Tirmazee

The aim of this paper primarily is to see whether departures from relative factor price equality leads to differences in the mix of industries that regions produce. Bernard et al (2002) suggests four reasons as to why, even with trade, relative factor prices should vary across regions, namely: i) multiple cones of diversification, ii) region-industry technology differences, iii) agglomeration and iv) increasing returns to scale. However this paper specifically deals with cones of diversification as an explanation of relative factor price equality. Regions characterized by relative factor price equalization have greater number of industries that they produce in common, or to be more precise, this paper aims to test the proposition that that larger the differences in the relative wages of two regions the smaller is the number of industries that they produce in common. This geographic variation in relative wages of workers and therefore the industrial production finds its justification in the basic predictions of the neoclassical theory of trade which suggests that regions with an abundance of a factor have a higher concentration of industries that use that factor intensively than regions with a scarcity of that factor.