Factor Price Equalization in Japanese Regions

This paper tests factor price equalization (FPE) in Japanese regions. I found that FPE is strongly rejected, even when unobserved cross-regional differences in factor quality and productivity are considered. The wage tends to be low in labour-abundant regions specializing in labour-intensive industries. The cross-regional gap in absolute wage levels remains large, while convergence is observed during the 1990s, a period of wage declines that appeared to be related to deep import penetration. This finding of FPE violation is to be expected, given the restricted interregional labour mobility and distinctive difference in specialization patterns across regions in Japan.