Revisiting TFP regional convergence in the EU

Using recent data on 155 NUTS (Nomenclature of Territorial Units for Statistics) regions across EU member states, we estimate region-specific production functions to generate regional TFP (Total Factor Productivity) series from 1996 to 2018. The empirical strategy we employ presents a number of desirable properties, as it is based on heterogeneous production functions and accommodates cross-sectional dependence and nonstationarity. We then apply panel unit root tests, some of which allow for structural breaks, to examine whether the European integration and expansion processes were accompanied with a convergence in productivity amongst NUTS regions. A number of results arise from our empirical analysis. First, there are significant disparities in terms of TFP across NUTS regions, with regions located in northern and western Europe typically showing the highest productivity levels and regions in eastern and southern Europe exhibiting the lowest levels. Second, the vast majority of the regions experienced an improvement in their productivity levels over the 23-year time span. The regions with the largest growth rates of productivity over the period are those located in eastern Europe. Third, a convergence dynamic was at play during the studied period. Indeed, findings show that regional TFP series converged towards the sample mean. Moreover, there is evidence that regional TFP of member states, who joined the EU 2004 onwards, converged to the mean TFP of the EU-12 member states.