RELATIVE FACTOR PRICES AND REGIONAL SPECIALISATION IN THE UNITED KINGDOM*
| DOI | http://doi.org/10.1111/j.1467-9485.1979.tb00539.x |
| Date | 01 June 1979 |
| Published date | 01 June 1979 |
Scottish Journal
of
Political Economy,
Vol.
26,
No.
2, June 1979
RELATIVE FACTOR PRICES AND REGIONAL
SPECIALISATION IN THE UNITED KINGDOM*
J.
K.
SWALES
University
of
Strathclyde
A
familiar neo-classical model of the economy treats of two homogeneous
factors of production, perfectly competitive firms, perfect factor markets and
a convex, constant returns to scale, production function for each good.' If
two such model economies which have the same production functions and
identical demand patterns begin to trade, the economy with the higher pre-
trade wage rate exports goods requiring a relatively capital intensive tech-
nology. The relatively capital abundant economy specialises production in
relatively capital intensive industries. In recent issues of the
Scottish Journal
of
Political Economy,
Dixon (1973a) and Smith (1975) try to apply neo-
classical trade theory to regional economics2
:
they attempt to test the hypo-
thesis that
". .
.
the pattern of regional specialisation in manufactures is
determined by inter-regional differences in the relative availabilities of capital
and labour" (Smith, 1975, p.
42).3
For the two Census of Production years,
1958 and 1963, they compare the capital abundance and the specialisation in
capital intensive industries of each
U.K.
region. The tests they perform are
suspect.
In the first section of this paper
I
examine the proxies that Dixon (1973a)
and Smith (1975) have used for the capital abundance of a region and the
capital intensity of an industry. The proxies for both these variables require
careful examination.
In
the second section
I
question the notion that the
results obtained by Smith (1975) lend support to this particular neo-classical
explanation of regional specialisation. The relationships that are found
between the proxies for the capital abundance of
a
region and the specialisa-
tion of that region in capital intensive industries have other, more plausible,
explanations. In the third section
I
use the framework outlined in Dixon
*
The author would like to thank Brian Ashcroft, Keith Ingham, Hugh McLachlan and
Gus O'Donnell for comments on an earlier draft of this paper.
There has been much criticism of the use in economics of this model. In particular,
debate in capital theory seems to show that there is
no
theoretical reason to expect that
a
production function which has aggregate capital
as
one input will be convex.
For
further
clarification
see
Harcourt (1972) and Bliss (1975, pp. 169-195): for the relevance to trade
theory
see
Metcalfe and Steedman (1973) and Samuelson (1975).
ZDixon (1973a) actually tests
a
number of hypotheses derived from different trade
theories. The test of the hypothesis stemming from the neoclassical, comparative cost
theory is the only one considered here.
The assumption of identical demand patterns in each region is not necessary for neo-
classical trade theory to explain regional specialisation.
Date of receipt of final manuscript:
5
September 1978.
127
128
J.
K.
SWALES
(1973a) and Smith (1975) to test the hypothesis that a region’s specialisation
in capital intensive industries
is
a function of the relative costs of labour and
capital inputs in that region. This hypothesis
is
slightly wider than that
presented by Dixon (1973a) and Smith (1975), in that it does not presuppose
that relative factor prices are determined by relative factor scarcities.
In
the
final section
I
evaluate the results of this test.
I
In
both Dixon (1973a) and Smith (1975) the capital abundance of a region
is proxied by the average earnings per employee in manufacturing industry
in that region: the data
on
average earnings are taken from the Census of
Production (Board of Trade, 1970). The higher the average earnings per
employee, the more capital abundant the region is thought to
be.4
However,
differences
in
average earnings between regions might not be the result of a
relative scarcity of labour. For example, it is difficult to believe that Wales, a
region with high unemployment and low participation rates in the post-war
peri~d,~ is a labour scarce region. But it is the U.K. region with the highest
average wages and salaries per employee for the years 1958 and 1963 (Board
of Trade, 1970). Two points seem particularly important here. First, regional
differences in earnings per employee might reflect regional differences in Trade
Union bargaining strenah at the plant level. Secondly, average earnings per
employee vary markedly at the U.K. level between industries and these
differences persist within individual regions. For instance, in the Northern
Region for both 1958 and 1963 average earnings per employee were over
twice as high in the chemical industry as in clothing and footwear (Board of
Trade, 1970). It is therefore conceivable that regional differences in earnings
per employee might be the result of regional variations
in
industrial structure
rather than inherent factor scarcities. Therefore if figures for average wages
and salaries per employee are to be used as a proxy for a region’s capital
abundance, some attempt should be made to standardise for regional
differences in industrial structure.
The issues involved in measuring, or finding a proxy for, the capital
intensity
of
an industry’s technology are more complex. There is an important
distinction that must
be
made here between an industry’s technology and
an
individual technique.
An
industry’s technology can
be
represented by a
“book
of
blueprints” that includes every technically efficient technique
within
In
fact under the conditions assumed by Dixon (1973a) and Smith (1975) neo-classical
trade theory predicts factor price equalisation amongst trading regions after the introduction
of
free trade. Presumably, here, there must
be
posited some barrier, say transport costs, to
complete inter-regional factor price equalisation.
In
the period 1957-64, the average male activity rate
in
Wales was
70
per
cent, against
a
figure for Great Britain
as
a whole of
77.1
per
cent: for females the Welsh activity rate
was 26.3 per cent,
as
against the British average of
37.4
per cent (Galambos, 1967). Similarly
in
each year between 1958 and 1963 inclusive, Welsh unemployment was at a rate higher
than the British average
(Department
of
Employment Gruette,
Jan. 1976, Table 113).
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