Regional income divergence: a test of the endogenous growth theory

Abstract

The study of regional income differences has been a matter of considerable debate and empirical testing for many years. More than three decades ago, Easterlin suggested that convergence of regional income levels ought not be held as a certain and inevitable result of the process of trade and economic development. He pointed out that while trade and free movement of labor may exert some pressure towards convergence of wages and income, there are other dynamic processes that can thwart the equilibrating effects of free trade in resources and goods. The notion that free trade and efficient markets ensure long‐run equilibrium among regional income flows in a changing environment has been challenged more vigorously in recent years. Eberts has suggested that incomplete information and mismatch between worker skills and job requirements, and institutional barriers to mobility often lead to incomplete adjustment in wages and persistent differences in regional income levels. This paper contends that swift convergence of regional income flows to a steady state cannot materialize unless investments in human capital and research are uniform across regions. In the context of the endogenous growth theory, convergence of per capita income is not synonymous with convergence of total factor productivity. As Abramovitz has pointed out, even if total factor productivity across regions show convergence, demographic and investment factors may inhibit complete convergence in per capita income.