Widening Gaps: Regional Inequality within Advanced Economies

IMF Blog, October 9, 2019

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Differences in economic performance between regions within countries can be large and sometimes even larger than between countries.
Example comparisons in the source:
- Average real GDP per person in the United States is about 90 percent higher than in Slovakia.
- Within the United States, per capita GDP in the state of New York is 100 percent higher than in Mississippi.
Large and persistent regional gaps can undermine inclusive growth, fuel discontent, and erode social trust and cohesion.
Chapter 2 of the World Economic Outlook examines gaps between better and worse performing regions in advanced economies and analyzes regional labor market responses to trade and technology shocks.

90/10 ratio: real GDP per capita of the region at the 90th percentile divided by that of the region at the 10th percentile within a country.
- Italy: 90/10 ratio is about 2 (Trento about twice as large as Sicily).
- Japan: 90/10 ratio is 1.35.
- Advanced economies (including the United States): 90/10 ratio is now at about 1.7, indicating the 90th percentile region is, on average, 70 percent richer than the 10th percentile region.
Note: incomes tend to vary much more within regions than between them.
Rising disparities imply poorer regions in advanced economies are no longer catching up to the rich as fast as they used to.

Classification of a lagging region:
- Initial real GDP per capita in 2000 is below the country’s median region, and
- The region’s average growth over the period 2000–16 is below the country’s average growth over the same period.
Typical unfavorable attributes of lagging regions:
- Worse health outcomes: higher infant mortality and lower life expectancy.
- Smaller shares of college-educated workers.
- Smaller shares of people in their prime (considered to be 25 to 54 years old).
- Higher unemployment rates.
- Smaller share of people participating in the labor force.
Labor productivity gaps (output per worker) in lagging regions across sectors:
- About 5 percent less in public services.
- Around 15 percent less in manufacturing industries and finance and professional services.
Sectoral specialization:
- Poorer regions tend to specialize in agriculture and manufacturing rather than high productivity service sectors such as information technology and communications and finance.
Climate change risk:
- Rising temperatures may lower labor productivity in agriculture and heat-exposed industries, often affecting lagging regions more.

Trade shocks (increases in import competition in external markets):
- Do not have significant effects on regional unemployment on average, both overall and for lagging regions specifically.
- Tend to reduce labor force participation after one year, but this effect quickly fades.
Technology shocks (proxied by a decline in the cost of machinery and equipment):
- A negative technology shock raises unemployment in all regions that are more vulnerable to automation, with lagging regions particularly hurt.
- Automation-prone lagging regions experience a statistically significant drop in people leaving after the shock, suggesting workers in these regions find it harder to move out in search of better employment.
- Labour’s adjustment to technology shocks in lagging regions is hampered.

Improve market functioning:
- Reduce distortions and encourage more open and flexible markets to minimize unemployment increases from shocks and improve reallocation of workers and capital.
Labor market policies:
- Retrain the displaced and speed re-employment, with particular focus on lagging regions.
- Boost educational and training quality to adapt to the changing world of work; this would disproportionately benefit lagging regions where unemployment is higher.
Product market openness:
- Lower barriers to entry and greater trade openness can facilitate movement of capital to regions and firms where returns are higher.
Fiscal and place-based policies:
- Target fiscal support to lagging regions and implement programs to ease worker relocation and provide buffers against regional shocks.
- Place-based policies must be carefully designed to help rather than hinder adjustment.

Widening Gaps: Regional Inequality within Advanced Economies — John Bluedorn, Weicheng Lian, Natalija Novta, Yannick Timmer; October 9, 2019.