International Regional Science Review

http://irx.sagepub.com Spatial Inequality in Productivity in the European Union: Sectoral and Regional Factors
Roberto Ezcurra, Pedro Pascual and Manuel Rapn International Regional Science Review 2007; 30; 384 DOI: 10.1177/0160017606286424 The online version of this article can be found at: http://irx.sagepub.com/cgi/content/abstract/30/4/384

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INTERNATIONAL REGIONAL SCIENCE REVIEW 30, 4: 384407 (October 2007)

Ezcu rra et a l. / SPA 10.1177/0160017606286424 TERNATIONALDUCTIVITY IN THE EU VIEW (Vol. 3 0, No. 4, 2007) TIAL IN EQUALITY IN PRO REGIONAL SCIENCE RE IN

SPATIAL INEQUALITY IN PRODUCTIVITY IN THE EUROPEAN UNION: SECTORAL AND REGIONAL FACTORS
ROBERTO EZCURRA
Department of Economics, Universidad Pblica de Navarra, Campus de Arrosadia s/n., Pamplona, Spain, roberto.ezcurra@unavarra.es

PEDRO PASCUAL
Department of Economics, Universidad Pblica de Navarra, Campus de Arrosadia s/n., Pamplona, Spain, ppascual@unavarra.es

MANUEL RAPN
Department of Economics, Universidad Pblica de Navarra, Campus de Arrosadia s/n., Pamplona, Spain, mrapun@unavarra.es

To gain a deeper insight into territorial imbalances existing in the European Union, the authors analyzed the evolution of regional disparities in productivity between 1977 and 1999. The results obtained reveal an overall decrease in regional inequality in productivity throughout the study period, even though the density functions estimated suggest the existence of some degree of polarization in the regional distribution of output per worker. The article also examines the role played by sectoral and regional factors in productivity convergence, using a combination of shiftshare analysis and various theoretical results obtained in the literature on personal income distribution. The analysis shows that regional inequality in output per worker in the European Union is closely linked to intrinsic differences between regions. Likewise, the empirical evidence highlights the importance of the national component and spatial location in accounting for observed differences in sectoral productivity across the European regions. Finally, the findings support the relevance of one-sector growth models to explain per capita income disparities in the European context. Keywords: regional disparities; productivity; European Union

1. INTRODUCTION
In recent years, the issue of territorial imbalances in the European Union has been examined in numerous studies from a variety of different approaches.1 There are various reasons for the degree of interest surrounding this issue. Among them is
The authors thank two anonymous referees for their helpful comments and suggestions. Financial support from HEC (Coordinated Project SEJ2005-08738-C02-01-02) is gratefully acknowledged.
DOI: 10.1177/0160017606286424 2007 Sage Publications

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the fact that economic growth theory has advanced greatly over the past twenty years, coinciding with the introduction of endogenous growth models in the mideighties. Another, the need to reduce disparities in development across the various European regions, is directly related to some of the basic principles behind the forming of the Union, especially since the introduction of the Single Act and the Maastricht agreements. In particular, one of the specific assumptions of the European integration program is that it will drive the growth of all Member States, thereby increasing economic and social cohesion.2 In this context, various studies have focused on productivity as a key factor in regional growth in the European Union (Lpez-Bazo et al. 1999; Cuadrado-Roura, Mancha-Navarro, and Garrido-Yserte 2000). Specifically, Esteban (1994) has investigated to what extent observed disparities can be attributed to regional differences in various factors, by breaking down per capita income into output per worker, employment rate, and participation rate. His findings suggest that regional differences in productivity are the main reason for regional inequality in per capita income in the European Union.3 It therefore seems that the logical procedure would be to try to pinpoint the causes of regional differences in output per worker to gain a deeper understanding of the per capita income differences between European regions, which is, in fact, the issue that this study aims to address. One possible explanation of regional inequality in aggregate productivity might be related to significant differences in output per worker across the various sectors. If this were the case, significant long-standing disparities in regional productivity might well be perfectly compatible with processes of regional convergence in output per worker in each of the various sectors.4 In other words, this would mean that regional differences in per capita income might basically be due to variability in the industry mix across the European regions. In fact, as the European Commission (1999) has reported, regions specializing in dynamic, high-growth sectors tend to perform better in terms of per capita income. The industry mix in each region, meanwhile, would in theory depend on some kind of comparative advantage or circumstances in history. Disparities in productivity may, on the other hand, be related to intrinsic differences between regions. If this were the case, the main determinants of regional inequality in productivity would be those aggregate factors, such as infrastructure, human capital, and research and development (R&D) that have a uniform impact on productivity in all sectors. To gain a deeper insight into territorial imbalances in the European Union, in this article we analyze the possible presence of productivity convergence between 1977 and 1999. Specifically, this study aims to determine the impact of the respective roles played by regional and sectoral factors in the evolution of regional disparities in output per worker in the European context. In the process, it is also hoped that some new light will be shed on the characteristics of regional inequality and that ultimately some type of inference will emerge that might prove useful when it comes to designing regional policy and determining how to increase productivity in

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more backward regions. Our findings will also help to assess the theoretical relevance of one-sector growth models in attempting to account for regional per capita income disparities. The main contribution of this article with regard to the previous literature on the subject is related to the method used to analyze the origin of regional productivity disparities in the European Union. Specifically, we have employed a new approach to study this issue involving a combination of the shift-share analysis used by Esteban (2000) and various theoretical results obtained in the literature on personal income distribution. In particular, we have examined the role played by sectoral and regional factors in explaining spatial inequality in productivity, by means of the information provided by the so-called natural decomposition of the variance (Shorrocks 1982). It should also be pointed out that the analysis presented in this article is based on data supplied by the Cambridge Econometrics regional database. This source has enabled us to achieve a wider geographical and temporal scope in our study than is found in the majority of the existing research on these issues. The article is organized as follows. The next section contains an analysis of the evolution of regional disparities in productivity in the European Union. Section 3 presents a regional typology based on the dynamics of output, employment, and productivity over the study period. To further round out the results, section 4 explores the role played in this context by sectoral and regional elements. Finally, the main conclusions of the article are summed up in section 5.

2. REGIONAL DISPARITIES IN PRODUCTIVITY

Any attempt to study regional disparities within the European Union meets with the problem of lack of regional data. Some authors (Barro and Sala-i-Martin 1991; Sala-i-Martin 1996; Fagerberg and Verspagen 1996) choose to limit the number of countries in the sample for the sake of extending the period of observation. Others (Neven and Gouyette 1995; Lpez-Bazo et al. 1999) prefer to cover a wider geographical area, despite the fact that this restricts the length of the study period. In this respect, our article represents a break from the existing literature on this subject. The use of data supplied by Cambridge Econometrics has enabled us to work with data on value added at market prices and employment for 197 Nomenclature of Territorial Units for Statistics2 (NUTS2) regions throughout the period 1977 to 1999.5 We will begin by examining the evolution of regional productivity disparities in the European Union over the twenty-three years contemplated. In contrast to the procedure adopted in conventional convergence analysis, this article will approach the issue by calculating a series of measures traditionally used to study personal income distribution. However, since our unit of reference is the region and not the individual, we will then introduce into the analysis the relative frequencies of each observation. Thus, all the indicators calculated will be statistics weighted by the

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employment shares of the different regions. With a few exceptions (Ezcurra et al. 2005; Tortosa-Ausina, Mas, and Goerlich 2005), studies focusing on the convergence hypothesis tend to ignore differences in population, income, or employment across the various regions considered. This omission has particular repercussions in the European context, since it means assigning the same weight in the analysis to widely differing regions.6 Within the literature on personal income distribution, it is well known that the results may differ, at times substantially, according to which inequality measures are used in the analysis.7 Given the obvious difficulty arising from the fact that different indicators may give different orderings of the distributions to be compared, it would seem reasonable to check the robustness of our results against different inequality measures. In accordance with this procedure, in this article we have examined regional disparities in productivity in the European Union by means of the information provided by the Gini index, G, and the two measures proposed by Theil (1967) within the information theory context, T(0) and T(1), which can be written as
n n i j i

f f |y
G=
i=1 j=1

yj|

(1)

2y (2)

n y T( 0 ) = fi log yi i=1

and
n y y T(1) = fi i log i y y i=1

(3)

where yi and fi denote, respectively, the productivity and share in total employment
n

of region i, with y i = f i y i . We also take into account the standard deviation of

i =1

the logs, SD(log), and the coefficient of variation, CV, two measures of dispersion that are common in descriptive statistics and widely used in the convergence literature to capture the concept of sigma convergence.8 All the indices selected are independent of scale and size of population, and except for the standard deviation of the logs, they all fulfill the Pigou-Dalton transfer principle.9 Figure 1 presents the evolution of the inequality indices just mentioned. The results indicate that the dispersion of the distribution analyzed decreased between 1977 and 1999. Indeed, the various index values fell between 32 and 14 percent

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FIGURE 1.

Regional Inequality in Productivity (1977 = 100)

over the twenty-three years considered. This does not imply a uniform reduction in disparities throughout the period, however. In fact, by whichever measure of inequality it is viewed, the main decrease in inequality is seen to have taken place in the late seventies, followed by a period of stagnation in the two decades that followed. The standard deviation of the logs, moreover, though it is not ordinally equivalent to the remaining measures, can be seen to behave in a qualitatively similar fashion. Note, also, that the Theil indices do not appear to be particularly sensitive to the shares used to weight inequality. This is simply an indication of high positive correlation between regional employment and income shares in the European Union.10 Indeed, the average of the correlation coefficient between the two variables for the 1977 to 1999 period is .95. The various statistics calculated so far do not provide an accurate description of the regional distribution of productivity. We will now, therefore, estimate the density functions of the distribution analyzed. Following common practice in the literature, we will use nonparametric estimation techniques, thus avoiding the need to specify any particular functional form beforehand. This kind of approach undoubtedly offers major advantages in the present context, given that parametric approximations are lacking in generality and flexibility. Figure 2 shows the density functions, weighted by employment shares, of the regional distribution of output per worker. The x-axis represents the regional pro-

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FIGURE 2.

Density Functions of the Regional Distribution of Productivity

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ductivity normalized (taking 100 as the European average), and the y-axis indicates the density associated.11 Estimates are based on calculations using Gaussian kernel functions,12 while the optimal smoothing parameter value was determined in each case following Silverman (1986, 47). The results obtained reveal the presence of significant differences in the shape of the distribution analyzed between 1977 and 1999, showing that the initial situation did not remain stable throughout that time. As Figure 2 shows, the probability mass concentrated around the European average increased during the twenty-three years considered. At the same time, there was a reduction in the distance between the extreme values of the distribution. These findings are consistent with the evolution of regional productivity disparities described earlier. Likewise, the analysis carried out suggests the existence of some degree of polarization in the regional distribution of output per worker in the European context. The density functions estimated for 1977 are characterized by the presence of a single mode around the European average. However, in the following years, the shape of the distribution changes, and at the end of eighties, it is possible to appreciate a weak polarization into two groups. Indeed, in the latter half of the period considered, as well as the usual cluster of regions around the European average, there is a new local maximum situated at the lower end of the distribution. This result can be interpreted as an indication of the difficulties faced by some regions with relatively low levels of productivity to improve their relative positions. Finally, there are signs that suggest the possible formation of a third pole in the late nineties, integrated in this case by regions situated at the upper end of the distribution.

3. PRODUCTIVITY, OUTPUT, AND EMPLOYMENT GROWTH: A REGIONAL TYPOLOGY

As is widely known, variations in regional productivity over time are the result of changes in output and/or employment across the different regions. However, the analysis carried out so far has not taken into account the fact that productivity growth is the outcome of various types of adjustment processes; its distribution may, therefore, be spatially uneven (Paci and Pigliaru 1999). In order to investigate this issue, in this section we aim to perform a joint analysis of the regional growth rates of productivity (y i ), output (x i ), and employment (e i ), using the methodology proposed by Camagni and Capellin (1985).13 The main advantage of this approach lies in the fact that it not only helps us to understand how productivity in each region has evolved in relation to the community average but also provides us with information about the role played in the process by changes in output and employment. In fact, it is by combining growth rates corresponding to the three abovementioned variables throughout the period 1977 to 1999 that we are able to obtain the regional typology shown in Table 1. The results obtained when this approach is applied in the context of the present study are shown in Figures 3 and 4.14 Thus, output and employment in the European

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Ezcurra et al. / SPATIAL INEQUALITY IN PRODUCTIVITY IN THE EU TABLE 1. Regional Typology Productivity Type I regions Type II regions Type III regions Type IV regions Type V regions Type VI regions yi yi yi yi yi yi >y >y >y <y <y <y Output xi xi xi xi xi xi >x >x <x >x <x <x

391

Employment ei ei ei ei ei ei >e <e <e >e >e <e

Note: y, x, and e denote respectively the average growth rates of productivity, output, and employment in the European Union between 1977 and 1999.

Union have experienced annual average growth of 2.22 and 0.41 percent, respectively, over the course of the twenty-three years considered. The immediate reflection of this can be seen in the productivity trend, where there is an average growth rate of 1.81 percent. There exist seventy-nine regions in particular in which productivity during the sample period has grown above the community average. The situation varies across these regions, however:
Thirty-four regions (21 percent of the total population in 1999) have registered output and employment increases above the European average (Type I regions). Close observation of Figure 4, however, reveals that this group is lacking in homogeneity in terms of per capita income. Featuring among its members, we can see, on one hand, Ireland, and part of Spain and Portugal; that is, some of the least developed regions of the Union in 1977. Nevertheless, these regions have shown themselves to possess some capacity to reorganize their productive systems, such that their output increases have had positive repercussions in the evolution of employment and productivity. At the same time, however, growth in the three variables considered also surpasses the community average in several regions characterized by high per capita income levels. This is the case of Darmstadt, Oberbayern, Stockholm, or Uusimaa, for example. Twenty-two regions (12 percent of the total population in 1999) have achieved output growth rates above the European average during the period analyzed, though they are below average in terms of employment growth (Type II regions). This group is formed by practically the whole of Finland, some regions of Western France, and part of Spain. The majority are immersed in restructuring processes requiring relatively major reorganizational efforts, characterized by the relocation of resources from labor intensive sectors to other activities, where the capital-labor ratio is higher and technology plays a more prominent role. Twenty-three regions (10 percent of the total population in 1999) exhibit less dynamic growth in output and employment than the European Union as a whole during the twenty-three years contemplated (Type III regions). In fact, seventeen of them (7 percent of the total population in 1999) register a decline in employment between

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FIGURE 3.

Productivity, Output, and Employment Growth: A Regional Typology

1977 and 1999. This group includes a number of regions situated in central France, northern United Kingdom, and southern Belgium and Italy. The majority of these areas are experiencing processes involving the abandonment of inefficient activities, often requiring adjustments in the workforce. As a feature of this general situation, it can be seen that most of the productivity gains in these regions have been achieved at the expense of lost jobs.

Meanwhile, the different situations faced by the 115 regions where productivity has grown at a rate below the European average for the period examined are as follows:
In forty-four of these regions (17 percent of the total population in 1999), growth in both output and employment exceeds the community average, although the increase is greater in employment than in output (Type IV regions). This group includes a large number of United Kingdom, German, and Dutch regions. Generally speaking, they tend to be areas in which the secondary sector played a leading role at the start of the sample period. However, as a consequence of the reconversion and restructuring pro-

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FIGURE 4.

The Spatial Distribution of Productivity, Output, and Employment Growth

cesses affecting the European industrial sector following the crisis of the seventies, these regions have developed new productive activities, which, while having proved their capacity to generate employment, are not yet in a position to sell their output in todays increasingly competitive and integrated markets (Rodrguez-Pose 1998). Twenty-two regions (11 percent of the total population in 1999) have registered output growth rates below the European average throughout the twenty-three year study period, while achieving above-average growth in employment (Type V regions). This group is composed mainly of traditionally industrial regions in northern Germany. In contrast to the previous group, political and social pressure to protect employment in these regions has resulted in the survival of a range of relatively inefficient activities, which helps to explain the below-average growth in output in these areas. In forty-nine regions (27 percent of the total population in 1999), growth in both output and employment remained below the European average between 1977 and 1999 (Type VI regions). In fact, thirty-two of these regions (14 percent of the total population in 1999) suffered to some degree from job losses. At first sight, these results appear to indicate a state of economic decline. Classed within this group, we find regions that were highly dynamic in the recent past, thanks mainly to their trend in

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industry. Indeed, this is the case of practically the whole of Sweden, northern France and Italy, and various regions in Germany and the United Kingdom. In addition, this group is formed by a number of regions in Greece and southern Italy. In this case, they are areas that were marked at the start of the sample period by productive structures in which agriculture played a prominent role and the services sector had barely developed.

Last, there are three regions (2 percent of the total population in 1999) that experienced productivity growth rates on a par with the European average during the period contemplated. These were Brabant Wallon, Provence-Cte dAzur, and Emilia Romagna. Figure 4 shows, furthermore, that despite the fact that the regions of the various Member States show different behavior patterns over time in terms of productivity, output, and employment growth, in most cases the fact of their belonging to a particular country means that they appear quite closely grouped on the map and determines their position with respect to the rest. There are, of course, some exceptions, but the data confirm the general trend just described. In any event, in the next section we will be able to take a closer look to assess the importance of the national component in explaining existing regional productivity disparities within the European setting. Finally, it should be pointed out that the results obtained in this analysis are consistent with those reported in Cuadrado-Roura, Mancha-Navarro, and GarridoYserte (2000) for a more limited geographical and temporal scope than that considered in our case.

4. EXPLANATORY FACTORS OF REGIONAL DIFFERENCES IN PRODUCTIVITY: SECTORAL AND REGIONAL ELEMENTS

As we have already stated in the introduction to this article, findings from Esteban (1994) reveal that the main explanation for regional disparities in per capita income within the European Union is to be found in regional inequality in productivity. This makes it all the more crucial to identify and examine the causes that lead to regional differences in output per worker. This, therefore, is the issue that will be addressed in the section that follows. The aggregate productivity of a region can be expressed as the weighted average of output per worker across the various sectors. Thus, for region i, we can write
yi =
m m x ij eij xi = = yij s ij e e ei j = i ij j=1 i

(4)

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where the subindices i and j denote regions and sectors, respectively, while and e ij

x ij e ij

= y ij

= s ij . ei Expression 4 states that regional productivity differences can be attributed to two factors (or a combination of them both). A first possible explanation of regional disparities in productivity might have to do with differences in output per worker in the m sectors considered. Therefore, even if there were no regional disparities in each individual sector, regions specializing in more productive sectors would attain higher than average aggregate productivity. Alternatively, regional disparities in output per worker may also be a direct result of the differences in regional endowments of certain aggregate factors that exert the same influence on productivity in the various sectors. To assess the relevance of each of these possible explanations to the European situation, it will be necessary to decompose the productivity gap between each of the regions considered and the European average. According to Esteban (2000), a useful technique for an initial exploration of the issue is shift-share analysis. Though this technique was originally proposed by Dunn (1960), it has since been the subject of intense criticism and thorough revision, leading to a considerably improved reformulation of the original. Shift-share analysis was originally designed as a technique for analyzing growth in regional employment. It can, however, be directly applied to the study of output per worker. The idea is quite simple. For our case, it is a question of decomposing the productivity gap between a given region and the European average to capture the respective roles of three factors: industry mix, region-specific factors with a uniform effect on all sectors and, finally, interaction between the first two elements. Thus, using the same expression as in the case above, average productivity at European level can be written as
m

y = s j yj
j=1

(5)

where sj and yj denote, respectively, sector js employment share and its productivity at the European level. To isolate the role played by industry mix in the region, expression 4 can be rewritten as
m m

yi = s ij yij = [( s ij s j ) + s j ][( yij y j ) + y j ]

j=1 j=1

(6)

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With some algebra, the above expression will give the productivity differential between region i and the European average in any given year. In particular,
m m m

yi y = ( s ij s j ) y j + ( yij y j )s j + ( s ij s j )( yij y j )
j=1 j=1 j=1

(7)

Or alternatively,
i = i + i + i. (8)

In other words, the productivity gap between each of the regions considered and the European average, i, can be expressed as the sum of three factors. The first of these, i, is known as the structural component, which measures the impact of the difference between the regions industry mix and the European average, assuming that output per worker in each sector is the same across all regions. Specifically, i takes positive values if the region is relatively more specialized (sij > sj) in sectors with high output per worker at the European level. In fact, i reaches its highest value when a region specializes exclusively in the sector with the highest average productivity. The regional or differential component, i, meanwhile, captures that part of i that can be attributed to sectoral productivity gaps between region i and the community average. In this case, the region is assigned an industry mix equal to the European average. Therefore, i takes positive values if region is sectoral productivity is higher than the European average (yij > yj). Last, the allocative component, i, captures the interaction between i and i, which in turn indicates the regions degree of specialization in sectors where productivity is higher than the European average. It is easy to appreciate that i takes positive values if the region is relatively specialized in sectors with a productivity level above the European average. Thus, i can be taken as an index of the efficiency of the region in allocating resources among the various sectors. Our purpose in this section is to examine the contribution of each of the summands in expression 8 to global inequality in European regional productivity differentials. For this, we have proceeded to decompose the variance of regional productivity gaps. At this point, however, it is worth recalling that the variance is not a conventional measure of inequality. Indeed, although it fulfills the condition of independence with respect to population size and the Pigou-Dalton transfer principle, the variance is not independent of scale (Cowell 1995). To overcome this problem, we have decided to modify expression 8, by dividing each side of the equations
m

by y = s j y j . This done, we have

j =1

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= i + i + i .

(9)

Thus, the index value remains unaltered if the output per worker of each region is modified in the same proportion. Likewise, taking into account that the European regions differ widely in terms of employment, we have weighted regional productivity values by employment shares. We are now ready to analyze the contribution of each of the summands in expression 9 to regional productivity disparities with respect to the European average. Specifically, by applying the inequality measurement just described, we have
Var( ) = Var( ) + Var( ) + Var( ) + 2[Cov( , ) + Cov( , ) + Cov(, )]. (10)

As can be appreciated from expression 10, the variance of is not generally equal to the sum of the variances of each of the components considered. Specifically, it is the correlation between the various elements that gives rise to the problems associated with this type of decomposition. In fact, it is necessary to determine how interaction among the various components, expressed in terms of their corresponding covariances, is to be distributed over their individual contributions. Nevertheless, since there are several ways of making the distribution, it is not possible to find a unique factorial decomposition of Var(). To determine the contribution of each component to global inequality, it is necessary to establish a rule whereby to distribute the effects of interaction between the various components over their individual contributions. Given that we have, in principle, no further information in this respect, we have opted to assign to each component half the covariance by which it is affected, as stated in expression 10. This is what Shorrocks (1982) called the natural decomposition of the variance in the context of the literature on personal income distribution.15 According to this rule, the role of the structural component in global inequality in regional productivity gaps will be given by
Var( ) = Var( ) + Cov( , ) + Cov( , ) = Cov( , ) + Cov( , ) + Cov( , ) = Cov( , ) (11)

Likewise, the expressions for the regional and allocative components are analogous, such that
Var( ) = Cov(, ) (12)

and

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Var( ) = Cov( , ).

(13)

Note that the different terms in Var(.) are the sums of the elements in each of the rows (columns) of the matrix of variances and covariances for the various factors into which regional productivity gaps have been disaggregated. Likewise, it is important to note that Var(.) are not true indices of inequality. Indeed, the contribution of an individual component may take a negative value when Cov(.) < 0. In these cases, the component in question would be exerting a compensatory effect on regional productivity gaps generated by the remaining components. In any event,
Var( ) = Var( ) + Var( ) + Var( ). (14)

It is worth underlining the fact that, just as occurs in conventional shift-share analysis, the results obtained by applying this methodology are directly related with the number of productive activities considered in the analysis. In this sense, a small number of sectors would tend to emphasize similarity between the productive structures of the different regions, thus underestimating the importance of the structural component in accounting for regional productivity dispersion, while high levels of sectoral disaggregation would have the opposite effect. Taking these considerations into account, we have decided to use seventeen sectors from the NACECLIO R17 classification. Table 2 shows the values resulting from the natural decomposition of the variance of the regional productivity differentials in the European Union for the 1977 to 1999 period. In aggregate terms, regional productivity disparities decreased over the twenty-three years contemplated, given that the value of Var() fell from .1064 in 1977 to .0782 in 1999, which represents a 26 percent reduction. The process has not been uniform throughout the period, however. In fact, the reduction in disparities was concentrated in the period between 1977 and the early eighties. Subsequently, there was a slight increase in regional productivity differentials, but not enough to compensate for the reduction that had taken place previously. This evolution of Var() is consistent with the outcomes achieved in the second section of this article. Table 2 also reveals that the structural and regional components shared a similar evolutionary pattern to that of Var(), which means a decline in inequality over the whole period observed. Indeed, the values for Var( ) and Var( ) decreased respectively by 35 and 33 percent between 1977 and 1999. The allocative component, meanwhile, deserves further comment. Thus, Var( ) decreased by 72 percent in absolute terms over the twenty-three years contemplated. However, its negative sign suggests that the allocative component had a compensatory effect on the productivity differentials resulting from the remaining factors.

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Ezcurra et al. / SPATIAL INEQUALITY IN PRODUCTIVITY IN THE EU TABLE 2. Contributions to the Regional Inequality in Productivity of the Structural, Regional, and Allocative Component Year 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Var( ) .1064 .1059 .0975 .0907 .0732 .0729 .0718 .0709 .0732 .0720 .0672 .0668 .0682 .0708 .0716 .0721 .0726 .0710 .0732 .0741 .0747 .0762 .0782 % 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Var( ) .0101 .0126 .0103 .0128 .0075 .0075 .0084 .0070 .0081 .0091 .0085 .0081 .0074 .0074 .0079 .0073 .0075 .0066 .0067 .0065 .0062 .0058 .0065 % 9.45 9.31 8.24 7.46 10.29 9.88 11.28 10.79 10.79 10.65 11.78 12.75 12.26 11.06 11.30 10.29 9.59 10.33 9.60 9.24 8.89 8.61 8.10 Var() .1167 .1096 .1001 .0845 .0755 .0723 .0686 .0698 .0707 .0674 .0638 .0642 .0668 .0684 .0680 .0690 .0700 .0711 .0727 .0735 .0749 .0774 .0774 % 109.71 100.98 100.40 86.52 103.26 98.75 95.09 99.48 96.33 91.66 93.90 96.73 99.36 97.28 95.36 95.85 95.78 101.09 99.80 99.72 100.78 102.63 98.88 Var( ) .0204 .0163 .0130 .0065 .0098 .0069 .0051 .0060 .0056 .0046 .0051 .0055 .0061 .0050 .0043 .0042 .0049 .0066 .0062 .0060 .0064 .0070 .0057

399

% 19.16 17.97 15.66 13.80 13.41 9.96 7.51 7.47 7.88 8.45 8.45 7.51 7.56 6.42 5.75 5.70 7.52 8.24 8.03 7.70 8.02 8.17 7.45

According to Table 2, the most important impact on global inequality in productivity came from the regional component. In fact, although the relative importance of Var( ) decreased by 11 percent over the time period considered, in 1999, it still accounted for 99 percent of global inequality. Likewise, the effect on regional productivity gaps played by the structural component remained practically the same over time, and stood at 8 percent by the late nineties. Finally, the relative weight of the allocative component decreased in absolute terms by 12 percent over the twenty-three years considered, finishing the period at 7 percent. The negative sign is a result of negative correlation between and and shows the allocative component to have generated a reduction in regional productivity gaps of around 7 percent in 1999. Overall, these results confirm those reported in Esteban (2000), the geographical and temporal scope of which was much narrower than that covered in the present article.16 It should be pointed out that there are major differences between the two studies, however. Thus, while Esteban (2000) based his conclusions mainly on

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a regression analysis of cross-sectional data, where i is explained by i, i, and i, we have made a deeper analysis of the role of the structural, regional, and allocative components in the regional productivity disparities observed in the European Union, via the natural decomposition of the variance proposed by Shorrocks (1982) within the framework of the literature on personal income distribution. In any event, leaving aside these considerations, the analysis carried out so far highlights the importance of the regional component when attempting to explain regional disparities across the European Union. What, though, are the determining factors behind the observed disparities in sectoral productivity across the different regions? In an attempt to find an answer to this, we simulate regional productivity levels in a hypothetical situation in which all regions have the same productive structure, and therefore the sectoral distribution of employment in each region is equal to the community average during the twenty-three years contemplated. Under this idea, the virtual productivity level of region i would be given by
m

yi = yij s j .
j=1

(15)

Using this strategy, we will then be able to remove the influence of the sectoral composition of activity from the analysis and focus our attention exclusively on sectoral productivity levels. In this context, it is important to bear in mind that, since the pioneer study by Molle, Van Holst, and Smit (1980), the literature on spatial disparities in the European context has emphasized the importance of the specific features of the various countries in regional growth processes (Quah 1996; Rodrguez-Pose 1999; Ezcurra et al. 2005). The national component may, therefore, play an important role in the evolution of the virtual distribution just defined. To analyze the importance of the so-called country effect, following Quah (1996), we have constructed a conditioned distribution, obtained by normalizing each regions y i value according to the average virtual productivity of the country to which it belongs, excluding the region in question.17 Meanwhile, we have so far considered the various regions as isolated units and have thereby disregarded strictly the spatial dimension. This should raise no major problems, as long as each economy evolves independently of the remaining regions. However, this does not seem a very realistic assumption given the integration process currently under way in Europe, which is characterized by the decreasing relevance of national frontiers and a continual increase in the degree of interaction among regions. It is therefore reasonable to suppose, for example, that the virtual productivity of a given region might be linked to that of its adjacent regions. The traditional literature on economic convergence has tended to explore this undeniably interesting question by applying a set of techniques adopted from spatial econometrics (Lpez-Bazo et al. 1999; Fingleton 1999; Maza and Villaverde 2004). However, in this article we base our analysis of the subject on a new condi-

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FIGURE 5.

The Regional Differences in Sectoral Productivity and the National Component

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FIGURE 6.

The Regional Differences in Sectoral Productivity and the Spatial Dimension

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tioned distribution, obtained in this case by normalizing the y i value of each region according to the average virtual productivity of its ten nearest neighbors.18 These new conditioned distributions can be interpreted as that part of the distribution of y i that remains unexplained by the country effect and the spatial location of the various regions under consideration. Figures 5 and 6 present the density functions estimated from the original distribution of y i and the two conditioned distributions just defined.19 If we compare the results in each case with those for the original distribution of y i , we can see that there exists a greater concentration of density around the average. This is a clear indication of the relevance of the role played by the national component and the spatial variable in this context. Specifically, the empirical evidence presented reveals relatively substantial differences in the distribution of virtual productivity between any given country and the European Union as a whole. This confirms the fact that the observed regional disparities in sectoral productivity levels across the European Union are linked to countryspecific factors relating, for example, to historical, social and institutional elements. The analysis also shows that neighboring regions tend to register similar values of y i . This suggests that the spatial distribution of the variable of interest is not random, thus further highlighting the importance within this framework of those factors relating to the spatial location of the different regions.

5. CONCLUSIONS
To gain a deeper insight into territorial imbalances in development terms existing in the European Union, in this article we have analyzed the regional disparities in productivity between 1977 and 1999. The results obtained reveal an overall decrease in regional inequality in productivity throughout the study period. Nevertheless, this process of convergence has not been uniform over the twenty-three years contemplated. In fact, the greater part of the reduction in disparities took place at the end of seventies. In any event, the density functions estimated suggests the existence of some degree of polarization in the regional distribution of output per worker in the European context. However, when it comes to assessing these results, it is important to keep in mind that the evolution of regional productivity is subject to various types of adjustment processes, which would require deeper investigation than is possible in conventional aggregate analysis. The regional typology presented in this article does in fact show the behavior of the European regions to be clearly heterogeneous in this respect. In addition, we have studied the origin of regional disparities in output per worker by means of a new approach involving a combination of the shift-share analysis used by Esteban (2000) and various theoretical results achieved in the literature on personal income distribution. The results obtained reveal that regional inequality in productivity in the European Union is closely linked to intrinsic differences between regions. This being the case, the main factors in determining

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regional inequality in productivity would be basically those that have a uniform effect on productivity in all sectors. Industry mix, therefore, appears to have contributed relatively little to regional dispersion in average productivity over the twenty-three years covered by the study. Thus, the relatively minor role played by the structural component supports the relevance of one-sector growth models for analyzing regional disparities in per capita income. Likewise, the analysis carried out highlights the relevance of the country effect and the spatial location in explaining the observed disparities in sectoral productivity levels across the European regions. This confirms the significant role played by the national component and the geographical location of the different regions in this context. Finally, the empirical evidence provided by this analysis raises implications of potential importance to regional policy designers in search of ways to increase productivity in backward regions. For example, the fact that productivity differentials are linked mainly to region-specific factors seems to suggest the need to focus on policies aimed at encouraging investment in the productive environment, human capital, and infrastructure, as well as innovation and technology diffusion. This is consistent with current Objectives 1 and 3 of European Union regional policy. Meanwhile, given that regional disparities are not essentially a matter of differences in industry mix, policies designed to promote restructuring of this nature in more backward regions would seem less recommendable. Likewise, the major role of the national component in explaining regional productivity gaps is a clear indication of the need for custom-made development policies to improve the situation of countries whose productivity is below the community average, as proposed under the European Cohesion Fund.

NOTES
1. See, for example, Barro and Sala-i-Martin (1991, 1992); Dunford (1993); Armstrong (1995, 2002); Molle and Boeckhout (1995); Neven and Gouyette (1995); Fagerberg and Verspagen (1996); Sala-i-Martin (1996); Cheshire and Carbonaro (1996); Quah (1996); Rodrguez-Pose (1998, 1999); Fingleton (1999); Lpez-Bazo et al. (1999); Magrini (1999); Cheshire and Magrini (2000); CuadradoRoura, Mancha-Navarro, and Garrido-Yserte (2000, 2002); Terrasi (2002); Le Gallo (2004); or Ezcurra et al. (2005), among others. 2. Specifically, Article 2 of the Treaty of the European Union states that the Community shall have as its task to promote . . . a harmonious and balanced development of economic activities, . . . economic and social cohesion and solidarity among Member States. 3. In contrast to the situation in Europe, Browne (1989) and Carlino (1992) reported the main cause of regional inequality in per capita income in the United States to be regional variability in unemployment rates. 4. In fact, Paci (1997) detected convergence in the secondary and tertiary sectors in 109 European regions over the 1980 to 1990 period. 5. Nevertheless, lack of complete series obliged us to exclude from our study the countries incorporated into the European Union in 2004, the Lnder of former East Germany, the French Overseas

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departments, and the Spanish territories in North Africa. Likewise, monetary variables have been converted into constant 1990 euros by applying the corresponding deflators, thus enabling us to compare data for different years in real terms. 6. In employment terms, for example, 1999 figures ranged between sixteen thousand employed in the Finnish region of Aland and more than 5 million in le de France. 7. In this context, an inequality measure is a continuous function that associates to every distribution in the analysis a real number summarizing its level of dispersion. For a more detailed discussion of this point, see, for example, Sen (1973). 8. In contrast to the procedure adopted in conventional convergence analysis, for the purposes of this article, both statistics were calculated after including the corresponding weightings based on employment shares. 9. The Pigou-Dalton transfer principle is a property commonly required of inequality measures, under which any income transfer from a rich individual (region) to a poorer one that does not invert their relative positions must reduce the inequality. For further details about the definitions and properties of the different measures considered, see Chakravarty (1990) or Cowell (1995). 10. Recall that in this context the only difference between T(0) and T(1) is the interchanging roles played by the employment and income shares. 11. Though density functions were estimated for each year of the period analyzed, to save space, we present only those of 1977, 1980, 1985, 1990, 1995, and 1999. The rest are available from the authors upon request. 12. To check the robustness of our conclusions to the choice of the kernel function, we repeated the analysis using Epanechnikov kernels instead. The results, which were very similar, are not reported here for lack of space but are available from the authors upon request. 13. A slightly adapted version of this method has been used by Cuadrado-Roura, Mancha-Navarro, and Garrido-Yserte (2000) to examine productivity convergence in ninety-seven European regions between 1980 and 1993. 14. When interpreting Figure 3, it is necessary to bear in mind that we have standardized regional output and employment growth rates according to the European average (100). Likewise, the straight line indicates combinations of output and employment growth rates that generate a productivity growth rate equal to the community average. 15. For further details, see also Shorrocks (1983). 16. In fact, Esteban (2000) included different sets of countries and years in his analysis. Thus, this author considered first of all Belgium, France, Italy, Portugal, and Spain, for which he used only 1986 data for value added at market prices for seventeen sectors. The inclusion of Germany in this group of countries means reducing the sectoral disaggregation to six sectors at no alteration at all to the study period. Likewise, he used 1989 data for France, Germany, Italy, Portugal, and Spain covering six sectors. Finally, the study considered 1986 data regarding value added at factor cost for the same number of sectors for France, Germany, Italy, Spain, and the United Kingdom. The fact is that, when all the different alternatives considered by Esteban (2000) are viewed jointly, the geographical scope of his analysis is reduced to France, Italy, and Spain. 17. For further details of the literature on regional conditioning, see Rey (2001). 18. According to the approach adopted by Quah (1996), an alternative would be to use the virtual productivity of physically adjacent regions. Nevertheless, due to the presence of islands in the European setting, a set of regions would have to be omitted from the analysis. For further details on this issue, see Le Gallo and Ertur (2003). 19. Estimates are based again on Gaussian kernel functions, while the optimal smoothing parameter value was determined in each case following Silverman (1986, 47). The results corresponding to the rest of years of the study period are available from the authors upon request.

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