-----Abstract-----

Models of economic geography predict that transportation costs directly affect demand
for goods and the supply of intermediate inputs. One of the reasons that international
trade is concentrated in the coastal provinces of China is that they have lower
transportation costs in transporting goods to other countries than do provinces in the
interior. This paper examines the relationship between the provincial wage rate and each
province’s access to international markets, and to suppliers of intermediate inputs. A
gravity equation is first estimated to construct these ‘market access’ and ‘supplier
access’ variables. In the second stage, the effect of market access and supplier access on
the wage rate is estimated. It is found that about one quarter of the provincial wage
differences in the coastal provinces and 15 per cent of the wage differences in the
interior provinces can be explained by these economic geography variables.

* UNU (United Nations Uninversity)
  WIDER (World Institute for Development Economics Research)