Exploring the Role of Unearned and Non-Wage Income on Regional Income Convergence

Abstract

(ProQuest: ... denotes formulae omitted.)1. IntroductionExogenous growth theory relates local economic growth to endowments and utilization of labor, capital, and an external technologic component (Solow, 1956; Swan, 1956). Assuming diminishing returns to capital and ubiquitous technology, the growth of regional economies will slow as they approach their steady state. With footloose, return-maximizing firms, there is an incentive for firms to relocate from regions approaching steady state levels to regions with greater potential for returns to investment. As firms (and capital) continue to relocate, levels of per capita income or output tend to converge across regions (Baumol, 1986; Barro and Sala-I-Martin, 1991; Islam, 2003). Convergence processes can be studied as beta convergence, where capital poor regions experience faster growth rates than capital rich regions, or sigma convergence, where there is a decrease in the standard deviation of per capita income or output over time. Further, club convergence occurs when differing convergence processes occur between regional economies grouped together based upon respective economic structures. Of these, beta convergence has been the most studied, with growing evidence of the theory (Galor, 1996; Drennan and Lobo, 1999). Convergence can further be framed as an unconditional process, where regional incomes or output convergence to a global mean regardless of local economic structure, or a conditional process, where differences in local economic structure are taken in to account and regional economies converge to their own steady state (Galor, 1996).To test for unconditional convergence, initial income levels are typically regressed against income change (Sala-I-Martin, 1996). Inclusion of additional predictor variables turns the unconditional model into a conditional one (Galor, 1996). While there re- mains an ongoing debate as to the mix and significance of conditioning variables, scant attention has been paid to the nuances of income itself (Austin and Schmidt, 1998; James and Campbell, 2014). As the key predictor variable in the convergence model income is implicitly tied to capital investment, and per capita income can be used as a measure of capital and labor productivity and utilization (Barro and Sala-IMartin, 1991; Sala-I-Martin, 1996). More directly, as firms relocate or capital shifts from locations of capital surplus (and, in turn, high wages) to regions of capital deficit (and, in turn, low wages), the marginal product of labor increases, thereby inducing relatively fast rates of income growth. Therefore, a negative relationship between income levels and income growth rates is expected in converging economies (Barro and Sala-I-Martin, 1992; Sala I-Martin, 1996).Income is comprised of earned and unearned, as well as wage and non-wage, components. Earned income typically takes the form of wages (W), supplements to wages (S), or non-wage proprietor's income (PI). Unearned income comes from sources such as Dividends, Interest, and Rents (DIR), and personal transfer payments (TP). While the wage components are most intuitively tied to convergence and exogenous growth, unearned and non-wage components of income can also significantly influence the growth rate of a region and operate with a different spatial pattern than earned, wage income (Austin and Schmidt, 1998; Campbell, 2003). The direct impact of unearned and non-wage income on the growth and convergence process has been relatively unexplored (Austin and Schmidt, 1998), though unearned and non-wage income has been included as an income component in a classical convergence analysis (e.g., Coughlin and Mandelbaum, 1988; Evans and Carras, 1996; Sherwood-Call, 1996; Austin and Schmidt, 1998; Rupasingha et al., 2002; Santopietro, 2002; Rapino et al., 2006; James and Moeller, 2013; James and Campbell, 2014) or excluded in part or whole (e.g., Barro and Sala-I-Martin, 1991; Sala-I-Martin, 1996; Austin and Schmidt, 1998; Higgins et al. …