The Impact of Geographical Distance of Iran's Provinces on Wages and Income Influence of Provinces on Each Other

Modern economic geography is a new filed in economic studies highlighted by Krugman’s papers (1991 & 1992) increasingly welcomed by economists. Krugman in his papers, proposed a theoretical model that holds opening trade leads to increased wages in some geographical areas where major productions are industrial. Increased real wages in such areas leads to more labor employment while scale economy makes such a process perpetual. This process results in the concentration of industrial activities in such areas. This paper uses Hanson’s empirical model (1998 & 2005) to empirically test Krugman model with Iran’s data. The empirical findings indicate that wages in the industry sector in each province of Iran is influenced by the wages and income of the industry sector in other provinces. The extent of such an influence has negative relationship with the distance to other provinces; the less the distance between provinces are, the more influence would exert a province’s wages and incomes in other provinces. In other words, the provinces with higher incomes and wages are located near each other. This statement is consistent with Krugman model indications. Accordingly nearness of any province to outstanding industrial centers is regarded a factor of the province’s industrialization and growth. Having tested Krugman model through Hanson method, the paper examines robustness of the model’s fitness by similar estimates during different intervals (sub-categories of the main interval). Annex II compares the model’s fitness in Iran with the similar estimates in other countries.