Putting new economic geography to the test: Free-ness of trade and agglomeration in the EU regions

For the NUTS II EU regions we estimate the wage equation that is central to the new economic geography literature. Our first main finding is that a spatial wage structure exists for the EU regions. Next, we analyze what our estimations imply for the link between the free-ness of trade and agglomeration for the EU regions. Based on multi-region simulations we find that the implied free-ness of trade is such that the degree of agglomeration is still limited. This conclusion is supported by evidence based on bilateral industry trade data. Our analysis also illustrates the current limitations of empirical research in new economic geography.