Interregional Income Transfer and the Regional Employment Structure : Transfer Problem in Three-sector and Two-region Model

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A share of labor force engaged in service sector tends to increase as economy develops nation as a whole. Contrary to the well known Petty-Clark's Law, regional employment structure does not necessarily follow this pattern. Namely, it is often observed that a share of labor force engaged in service sector in economically backward regions exceeds that in advanced regions. Interregional income transfer under the limited tradability of goods produced by service sector among regions can possibly result in this "paradoxical" observation. Subsidy from advanced region to backward region through the central government could be a major channel for the income transfer. Furthermore, relatively low interregional variability in salary compared with that in labor productivity can imply possible interregional income transfer through private firms which develop multi-regional operation.The most important implication derived from the above model is that income transfer from advanced regions to the back … More ward regions does not necessarily increase the level of income of backward regions at the expense of advanced regions. An increase in the effective demand through the transfer can improve national income level nation as a whole. Backward regions can contribute for accelerating economic development of a country and interregional income transfer can be used as an instrument for fiscal policies as far as marginal propensity to save and marginal propensity of "ship" goods to other region satisfy a certain conditions.This research has developed a three-sector two-region model of a national income determination in order to explain the role of interregional transfer from an economically advanced region to a backward region for the observed changes in employment structure in a process of economic development. The empirical study strongly indicates that interregional income transfer has a tendency to increase the share of labor force engaged in service sector in Japan, China and US.Namely, the share of labor engaged in service sector in the backward region could have been stimulated relative to that in manufacturing sector through interregional transfer, as far as marginal propensity to save in the advanced region exceed that in the backward region and marginal propensity to import for service across the region is relatively small for both advanced and backward regions. Less