A labor market based theory of regional economic development

The Borts and Stein (1964) theory of regional economic growth and developme nt has been widely accepted and discussed in regional economic development literature. Given their assumption that labor demand conditions are invaria nt between regions and that the labor demand is highly wage elastic, they c onclude that regional growth is primarily supply driven and differences in growth among regions arise due to differences in the growth of labor supply assuming that wage elasticity of labor supply is the same across regions. Muth (1968, 1971) claims to have verified the Borts and Steins (BS) conclus ion. We propose a regional labor market based model of economic development similar to BS with certain modifications in assumptions and show that the Borts-Stein-Muth (BSM) conclusion is based upon a narrow view of labor dema nd and supply elasticities. Our theory demonstrates that regional developme nt is mainly labor demand driven once we adopt a broader view of elasticiti es. The broader view incorporates the direct effect of wages on labor suppl y and labor demand as well as the indirect effects of wages through changes in inmigration and firms' formations in a region.