Divergence, Wage-Gap and Geography

We develop a geographic growth model where nominal wages are allowed to diverge between the two considered countries. Removing the standard assumption entailing that both countries always own a traditional sector, we argue that, as trade gets freer, the traditional sector of one country might cease to exist so that wages increase: it gives rise to an additional dispersion force independent of trade costs. Hence, the core-periphery outcome might never be reached, which contradicts previous literature’s results. We also question a hallmark of the literature since we argue that full agglomeration of firms might actually lead to slower growth for both countries.