AN ECONOMETRIC-MODEL OF MERSEYSIDE - VALIDATION AND POLICY SIMULATIONS

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 unemployment benefits. With all other factor prices being set exogenously to the region through elastic supply, the supply of manual labour (responding to traded sector wages set by world market conditions) determines the size of the region's output. The model's fit over the past is acceptable, though data is limited. Its simulation properties, contrasting with those of previous demand-driven models, imply high returns to policies that reduce local costs such as taxes, union mark-ups and transport charges.