Abstract
The neoclassical perspective, exemplified by Bertil Ohlin, predicts the fact of interregional per capita income convergence and is therefore often invoked in explaining its causes. However, convergence is also explained by other perspectives, such as Gunnar Myrdal’s circular and cumulative causation. Applying a flexible growth-accounting decomposition to nominal per capita income changes in U.S. counties (1969-1996), this paper finds that beta-convergence was generated by government transfer and wage spending, rather than the private sector forces postulated by Ohlin. Migration data suggest that the movement of retirees from rich counties to poor has been an important source of convergence.
Highlights
Does the gap between rich and poor regions grow or diminish over time? Perhaps the earliest discussion can be credited to David Hume, who posited convergence across regions based on the notion that firms tend to move out of highwage areas to regions with lower labor costs (Hume 1906, p. 28)
A few decades later, Adam Smith argued that "the very unequal price of labour which we frequently find in England in places at no great distance from one another" would be narrowed by freer movement of labor between English parishes-a movement restricted by government in the form of the "poor laws" (Smith 1937, p. 140). These views can be taken as representative of the liberal or laissezfaire tendency in classical economics: convergence is the natural outcome of a market economy, government action a cause of inequality
Perhaps the most interesting split between new liberal and old liberal on the issue of interregional convergence is that between two Swedish economists-Gunnar Myrdal and Bertil Ohlin-who came up with quite contradictory ideas regarding the effects of a market economy on interregional income convergence
Summary
Does the gap between rich and poor regions grow or diminish over time? Perhaps the earliest discussion can be credited to David Hume, who posited convergence across regions based on the notion that firms tend to move out of highwage areas to regions with lower labor costs (Hume 1906, p. 28). Ohlin suggests that trade in goods and factor migration would, over time, tend to diminish interregional differences in factor income This is a prime example of a perspective that views economic change as an equilibrating, selfdampening process. Applying circular and cumulative causation to regional growth processes, Myrdal maintains that market forces tend to widen interregional differences in factor income, causing rich regions to grow richer and poor regions to grow poorer. This divergence stems from two sources: external economies in the rich regions and what Myrdal terms "backwash effects," which retard growth in poor areas. Because growth is largely a circular and cumulative process, small government expenditures can set in motion sustained growth
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