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This paper uses a structural gravity model to explore the regional trade and welfare impact of the EU Cohesion Policy Transport Infrastructure Investment programme estimated using a novel data-set of the Generalised Transport Costs for the EU regions at the NUTS2 level. The results indicate that on average additional investment in transport infrastructure can increase NUTS2 total regional exports by 0.40% and regional real GDP by 1.13%. Central and Eastern European Regions enjoy the highest exports and GDP gains, while few Western European regions experience a negligible decrease in wages, which may occur as a result of factor price convergence.

I argue in this paper that the estimation of wage curves and NAWRUs at the country level suffers from spatial aggregation bias. Using European data for the years 2000-2017, I find steeper country level wage curves and higher NAWRUs, compared to estimating at the underlying regional level. The distribution of regional unemployment rates within countries over time is not mean-scaled. Regions with low unemployment rates are the main drivers of changes in aggregate unemployment. The steepness of a log-linear wage curve in regions with low unemployment dominates at the aggregate (country) level, overestimating wage pressure. Lagged wages are important in explaining wage growth, together with unemployment. This suggests that a wage curve fits the data better than the assumption of a NAWRU or long run natural rate of unemployment. With regional wage curves, spatial aggregation bias can produce aggregate data that resembles such a natural rate of unemployment, however.

This paper undertakes the simultaneous estimation of import elasticities of substitution (trade elasticities) within European Union (EU) regions, differentiating between imports from regions belonging to the same country (national or interregional trade) and regions belonging to other EU countries (international trade within the EU). We use a nested CES utility structure to derive the corresponding trade gravity equations and estimate them by way of Poisson pseudo-maximum likelihood regression. As the EU is a single market, the usual approach followed in the international trade literature that relies on changes in bilateral tariffs cannot be used to identify the trade elasticities. To address this issue, a very detailed definition and calculation of the ad valorem specification of transport costs is performed. The methodology takes into account the transport engineering and logistic characteristics of road freight transportation, which allows us to obtain a reliable measure of the generalized transport costs between regions. Trade elasticities are calculated at several levels of industrial aggregation, including individual sectors at 2-digit CPA classification, and their higher-level categories corresponding to agriculture, mining, and manufacturing. Results show that the trade elasticity increases the closer are the trading partners; i.e., national vs. foreign elasticities, thereby providing the first evidence of this widely presumed hypothesis. National trade elasticities are broadly double the value of their foreign counterparts. We also find that trade elasticities substantially decrease as commodities are considered at a higher level of aggregation. Our calculated trade elasticities can be adopted in a wide array of models of international trade, or spatial economic models such as Regional Computable General Equilibrium models (e.g. the RHOMOLO model), improving the results obtained from simulations aimed at policy analysis.

We estimate the variety gains of trade in Estonia, Latvia and Lithuania following the fall of the iron curtain more than a quarter of a century ago. We apply the methodology of Feenstra (1994); Broda and Weinstein (2006); Ardelean and Lugovskyy (2010) and Soderbery (2015) to domestic and international trade data for the period 1988-1997. Although, there was a decline in the number of local varieties during this period, an increase in the number of import varieties from the EU more than outweighed this decline. The increasing variety of imported goods from EU countries substantially lowered the cost of living, resulting in welfare gains to consumers that range from 0.73% in Latvia to 1.28% of GDP per year in Estonia.

We estimate the variety gains of trade in Estonia, Latvia and Lithuania following the fall of the iron curtain more than a quarter of a century ago. We apply the methodology of Feenstra (1994); Broda and Weinstein (2006); Ardelean and Lugovskyy (2010) and Soderbery (2015) to domestic and international trade data for the period 1988-1997. Although, there was a decline in the number of local varieties during this period, an increase in the number of import varieties from the EU more than outweighed this decline. The increasing variety of imported goods from EU countries substantially lowered the cost of living, resulting in welfare gains to consumers that range from 0.73% in Latvia to 1.28% of GDP per year in Estonia., JRC.I.1-Monitoring, Indicators & Impact Evaluation

In this paper we provide the mathematical presentation of the RHOMOLO model. In addition, we perform some stylized and illustrative simulations with the aim to make the reader familiar with the economic adjustment mechanisms incorporated into the model. Essentially, we attempt to offer the reader and the potential users of the model an intuition of the transmission channels existing in the current version RHOMOLO. The analysis is kept simple to facilitate a better understanding of the model's findings. We simulate a permanent demand-side shock implemented separately for each of the 267 regions contained in the model. We repeat the same simulation under three alternative labour market closures and three different imperfectly competitive product market structures., JRC.B.3-Territorial Development

In this paper we assess the system-wide economic impact of the key financial instruments adopted by the European Union for the implementation of the regional policy: The Structural funds and The Cohesion Funds. We take a bottom-up approach by aggregating the 86 categories of expenditures defined in the Structural and Cohesion Funds into six main policy variables. The outcomes of the simulations are the results of a combination of demand-and-supply-side shocks that are implemented into the RHOMOLO spatial and dynamic general equilibrium model calibrated on a set of inter-regional Social Accounting Matrices for the year 2010. In our analysis we document the direct, indirect, and general equilibrium effects of the EU regional policy at the regional, national, and EU level. In the short-run, our simulation exercise suggests a pronounced variegate patters across EU regions. In the long-run, a more homogenous spatial distribution is detected. Moreover, we identify and quantify the interregional spillover effects arising from trade links and capital mobility.

There exist marked differences in the educational attainment of immigrants, depending on both the level and distribution of income in the country of origin and destination. This paper estimates an education-specific gravity equation for migration between European countries. Given the lack of data on migration flows by level of education, these are proxied by the difference in resident migrants by nationality and level of education, between the years 2000 and 1990. I find that highly educated individuals are more likely to migrate. They are less sensitive to geographical and cultural distance as barriers to migration, but are not unambiguously more responsive to wage differentials. Controlling for education-specific wage differences between origin and destination removes only part of the observed differences in migration behaviour between education groups., JRC.B.3-Territorial Development

This report presents the current version of the European Commission's spatial computable general equilibrium model RHOMOLO, developed by the Directorate-General Joint Research Centre (DG JRC) in collaboration with the Directorate-General for Regional and Urban Policy (DG REGIO) to undertake the ex-ante impact assessment of EU policies and structural reforms. The RHOMOLO model has been used with DG REGIO for the impact assessment of Cohesion Policy, and with the European Investment Bank for impact assessment of EU investment support policies. The structure of the model departs from standard computable general equilibrium models in several dimensions. First, it generalises the modelling of market interactions by introducing imperfect competition in products and labour markets. Second, it exploits the advantages of a full asymmetric bilateral trade cost matrix for all EU regions to capture a rich set of spatial market interactions and regional features. Third, it acknowledges the importance of space also for non-market interactions through an inter-regional knowledge spill-over mechanism originating from research and development activities within a country. This report describes the theoretical foundation of RHOMOLO-v2 (v2 = version 2), its mathematical structure, dynamics, data sources and calibration to allow the reader to approach the model and its outputs with a higher degree of awareness of its strength and limitations. Indeed, as for any general equilibrium model with a reasonable level of complexity, in RHOMOLO it is often challenging to track the mechanisms at work after a policy shock and clearly disentangle causes and effects because of the high number of channels of adjustment and the presence of many feedback effects. The purpose of this documentation is thus to provide a compass to the reader to sail safely through its many equations, assumptions and connections., JRC.B.3-Territorial Development

Developing countries have increasingly engaged in Bilateral Investment Treaties (BITs) to attract foreign investors. While it is found that BITs are successful in attracting FDI, we argue that the effectiveness of BITs depends on the type of FDI. We find the effect of BITs to differ importantly across sectors of investment. FDI characterized by higher sunk investment costs responds more strongly to the signing of BITs. Given that the development impact of FDI differs according to the sector of investment, our results raise concerns on the effectiveness of BITs in attracting FDI in those sectors where it is considered most beneficial. ispartof: LICOS - Discussion Paper Series 346/2014 pages:1-48 status: published

This paper investigates the role of political representation in explaining geographical variation in social security and income tax transfers in Belgium. The transfers we consider are the net amount of federal income taxes and social security contributions paid and in-cash social benefits received. These make up the core of the Belgian welfare state and income redistribution. For the 1995-2010 period, we find that these transfers to inhabitants of a particular Belgian electoral district increase significantly with every extra federal minister originating from that electoral district. Given that such transfers are largely formula-based, and if anything would be easier to target across social groups rather than geographically, this result is surprising. Nevertheless, the result is robust to controlling for economic and demographic variables that are important determinants of transfers, i.e. (gross) income per capita and the share of the unemployed, the young and the retired, as well as to controlling for the share of parliamentary seats of the governing coalition per electoral district. The observed correlation between political representation and transfers is suggestive of a system with simultaneous causation, with politicians steering transfers to their constituencies in the hope to gain votes; and where voters in turn reward politicians in the hope to gain transfers. To isolate and quantify the causal link going from political representation to transfers, we identify two sets of exogenous changes in political representation and use an instrumental variable approach. A first set considers changes in political representation due to ministers having to resign, mainly due to political crises and scandals. A second set considers changes in the political representation due to changes in the borders of electoral districts in 2002. ispartof: VIVES discussion paper, 2011/25 pages:1-35 status: published

This paper derives a gravity equation for commuter flows from a simple spatial labor market model based on the classic model developed by Anderson and Van Wincoop in the context of international trade. The approach shows the importance of taking into account the effect of the economic structure of neighboring regions when explaining the size of the commuter flow between two locations, the omission of which would be a significant source of omitted variable bias. As an application, we use this model to identify the effect of regional borders and language borders on commuting using Belgian data on intermunicipality-level commuting between all pairs of municipalities. To handle observations with zero commuters, we estimate the model by means of a negative binomial regression. We went at length to control for relevant variables such as the driving time between two municipalities, but also the travel time by public transport. The theoretical model is used to calculate the relevant controls for economic size of the municipalities and their surroundings. We find that regional borders exert a sizable residual deterrent effect on commuting. This border-effect differs significantly between regions and depends on the direction in which the border is crossed, with commuting flows going from French-speaking areas to Dutch-speaking areas experiencing a stronger deterrent effect from the border; which probably reflects the fact that knowledge of French is relatively more wide-spread in the Dutch-speaking areas compared to the other way around. We consider two extensions of the model. In a first one, we estimate the elasticity of substation for labour from different locations. With an estimated value of 1.3, it seems workers from different localities are hardly substitutable. In the second extension, we use the regional wage-equilibrium condition from our theoretical framework to estimate how the counter-factual removal of a regional border would change regional wages. As it turns out, the estimated effect is quite large, with an upsurge in wages of about 50 percent in the entire south of the country, and with an effect which dies only slowly with distance. As this prediction seems unrealistic, we re-estimated the effects while imposing a higher elasticity of substitution of 2.3. Using this value still gives a rise of about 50 percent, but only for a selection of municipalities in the South of Belgium, with very high unemployment rates, and located closely to high labour demand in the North (in Flanders and Brussels). The effect on municipalities about 20-30 kms from the language border becomes negligible.

ispartof: VOKA Leerstoel "Groeikracht van de Vlaamse economie" pages:1-37 status: published

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Even in the absence of an explicit regional policy, countries redistribute substantial amounts of wealth between regions through taxation and social security. Using data on 140 European regions between 1995 and 2007, this paper nds that interregional income redistribution leads to lower regional economic growth and to slower within-country convergence. This may explain the observed lack of within-country convergence in the EU, in contrast to relatively fast between-country convergence where such redistributive schemes do not exist. The results suggest that investment in transport infrastructure or human capital offer better means to foster both regional growth and convergence. ispartof: VIVES discussion paper, 2009/4 pages:1-37 status: published

Over the last two decades the share of national income which accrues to labour has followed a marked downward trend across a host of industrialised countries. This paper reassesses the relative importance of several potential causes of this phenomenon. Overall, the findings suggest that lower trade costs and factors often associated with economic integration such as international low-wage competition and industry concentration have contributed to the decline in the labour share. However, their effects have been limited when compared to the effects of skill-based technological change and cyclical price changes of intermediary goods. ispartof: VIVES discussion paper, 2011/18 pages:1-37 status: published

This paper applies the Bond and Coombes (2007) algorithm to construct Travel-to-Work Areas for Belgium. We study how these functional labor markets evolved between 1981 and 2001 and find that the number of distinct regional labor markets decreased over time. For 2007, sector-specific Travel-to-Work Areas are constructed. The results reveal that the size of a sectors labor market increases with its degree of technological intensity. status: published

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ispartof: LICOS-Discussion paper series 271/2010 pages:1-40 status: published

Over the last two decades the share of national income which accrues to labour has followed a marked downward trend across a host of industrialised countries. This paper attempts to assess the importance of several potential causes of this phenomenon. We investigate compositional effects, the effect of declining trade costs, changes in the market structure (concentration) and the effect of low-wage competition between countries. Overall, the findings suggest that lower trade costs and factors related to economic integration such as industry concentration, the market power of firms and increased international low-wage competition indeed affect the labour share. However, their effect has been quite limited when compared to changes in the sectoral composition, the effects of technological change, cyclical factors and changes in the prices of intermediary goods. ispartof: Discussion paper series DP 199/2008 pages:1-31 status: published

This paper analyses the wage demands of a sector-level monopoly union facing internationally mobile firms. A simple two-country economic geography model is used to describe how firms relocate in function of international differences in production costs and market size. The union sets wages in function of the firm level labour demand elasticity and the responsiveness of firms to relocate internationally. If countries are sufficiently symmetric lower foreign wages and lower trade costs necessarily lead to lower union wage demands. With asymmetric countries these intuitive properties do not always hold. But even for symmetric countries it holds that small increases in market size or trade costs makes union wages more sensitive to the foreign wage level. ispartof: VIVES discussion paper, 2009/3 pages:1-27 nrpages: 38 status: published

nrpages: 38 status: published

This article describes a new Stata command called xtwest, which implements the four error-correction–based panel cointegration tests developed by Westerlund (2007). The tests are general enough to allow for a large degree of heterogeneity, both in the long-run cointegrating relationship and in the short-run dynamics, and dependence within as well as across the cross-sectional units.

We estimate how trade openness affects the relationship between wages, labour productivity and foreign wages using sector-level time series for several EU member states. In some countries wages became less responsive to foreign wages as trade costs declined. We show this counter-intuitive result is as expected when wages are set by a monopoly union with a preference for wages relative to employment. Trade liberalisation then leads to more wage discipline by forcing unions to set wages more in line with labour productivity. Foreign wages simultaneously become less relevant. Our results call to rethink how trade liberalisation is affecting unionized labour markets, and offer a possible explanation for the mixed evidence found by some tests for international factor price convergence.

De hoge (para)-fiscale druk in België wordt gezien als een belangrijke oorzaak van de hoge werkloosheidsgraad. Deze hoge werkloosheidsgraad gaat echter gepaard met een hoog aantal openstaande vacatures. Men kan zich dan ook de vraag stellen of verdere lastenverlagingen zullen bijdragen tot een vfirmindering van de werkloosheidsgraad. Deze studie beschrijft een eenvoudig maar realistisch kader waarbinnen de effecten van arbeidsmarktmaatregelen op de werkloosheid kunnen worden beschreven. Bij een vergelijking tussen België en Denemaken van de factoren die de werkloosheidsduur bepalen blijkt dat het Belgisch systeem van uitkeringen die niet beperkt zijn in de tijd de werkloosheidsduur significant verlengt.

This paper looks at how increasing economic integration affects wage bargaining between unions and firms if firms are internationally mobile. Using a simple NEG model we find that if firms are perfectly mobile, countries are sufficiently symmetric and wages are bargained over at the firm level they are set on the competitive level. For a more centralised bargaining scheme wage demands are made even if firms can perfectly threat to relocate. If countries are asymmetric full agglomeration becomes possible and rent-sharing between unions and firms then occurs as unions are able to appropriate part of the agglomeration rents in firm of higher wages. As agglomeration rents are a hump-shaped function of trade freeness in the larger country this implies the same non-monotonic relationship between wages and the level of trade freeness. We then investigate the case where wage bargaining takes place sequentially in each country. The comparative statics of the international Nash-equilibrium in wages show increased international economic integration only leads to tighter international wage competition if countries are sufficiently symmetric. For the asymmetric case the comparative advantage and relative size of the country detfirmine whether and how economic integration leads to lower wages.