The paper estimates an econometric model of Merseyside on annaual data
. The model is derived from a Heckscher-Ohlin framework for the traded
sector, set beside a non-traded sector and facing a positively sloped
supply curve of manual labour whose reservation wage is set by unempl
oyment benefits. With all other factor prices being set exogenously to
the region through elastic supply, the supply of manual labour (respo
nding to traded sector wages set by world market conditions) determine
s the size of the region's output. The model's fit over the past is ac
ceptable, though data is limited. Its simulation properties, contrasti
ng with those of previous demand-driven models, imply high returns to
policies that reduce local costs such as taxes, union mark-ups and tra
nsport charges.