Club convergence in regional labor productivity: how do Australian states and territories compare to the US, UK, and Canadian subnational regions?

Abstract

AbstractDeveloping strategies to enhance productivity growth requires identifying leading and lagging regions, industries, and growth drivers. However, there are limited cross-country studies using subnational data. Our study goes beyond the traditional country convergence approach and estimates labor productivity convergence using Philips and Sul’s club convergence approach and subnational data from 2004 to 2020. We aim to determine whether labor productivity growth rates in Australian states and territories are equal, converging, or divergent as compared to United States, United Kingdom, and Canadian subnational regions. The results show that five Australian jurisdictions, including Western Australia and New South Wales, are in the high labor productivity group (Club 1), while the remaining three i.e., Australian Capital Territory, Victoria, and Queensland, are in the moderate growth group (Club 2). We also used fixed effects models with least squares dummy variable estimators to identify the club’s characteristics. The results show that regions with a high proportion of employees in information and communications technology, energy, mining, and resources experienced higher labor productivity growth than those with a manufacturing sector. Human capital, innovation, and household disposable income were associated with high labor productivity, whereas high old-age dependency and children-to-women ratios were associated with lower growth. These results are consistent with the macroeconomic phenomenon that economic development leads to inequality and polarization in certain regions of a country. Nonetheless, the findings are useful for decision-makers and researchers to use in benchmarking and improving regional strategies by identifying regional peers and factors that influence convergence or divergence that can be improved. The results provide insightful findings for consideration by policymakers seeking to boost labor productivity or to bridge regional gaps in productivity.