Technology, growth and unemployment across European regions

The process of convergence in GDP per capita levels across European regions came to a halt in the 1980s, although the differences in GDP per capita remain substantial. Moreover, these differences are related to similarly persistent differences in unemployment rates. This paper argues that a perspective which, in addition to other factors, takes into account differences across regions in innovation and diffusion of technology may explain these findings. A simultaneous equation model with GDP per capita growth, employment growth and migration as endogenous Variables is proposed and estimated using data for 64 European regions in the 1980s. The results show that innovation and the diffusion of technology are indeed important factors behind European growth in the 1980s. However, due to a lack of own R&D capabilities, most poor regions fail to take advantage of the more advanced technologies available elsewhere. The growth of the poor regions is also hampered by an unfavourable industrial structure (the predominance of agriculture). As a consequence, growth of GDP per capita in the poorer regions is not substantially faster than in the richer ones (where growth is fuelled by much larger R&D efforts and a more advanced industrial structure). Although employment in poor regions actually grows somewhat faster than in the rich ones, so does labour supply, preventing a (relative) reduction in their rates of unemployment.