The role of employment, labour productivity and trade linkages in the evolution of European regional disparities

Abstract The paper disentangles the role of specific factors in the evolution of regional disparities within the EU. First, investigated is the role of employment and labour productivity, with particular reference to specific market-oriented sectors (manufacturing and private services). Second, studied is the role of trade linkages and proximities in the evolution of regional disparities on the EU. To achieve the aims, recently developed factor and spatial decompositions of the Theil index are applied to data at sectoral level covering the past twenty-five years. Furthermore, recent regional trade data are used to produce trade-based proximity matrices to compare with more traditional distance-based ones. This allows departing from a traditional conception of space as physical proximity, looking at the insertion in trade networks. The findings show a primary role of labour productivity differences in the explanation of regional differentials between the EU countries, but with a diminishing role after the Great Recession. Furthermore, detected is a raising importance of regional differences in the structure of labour markets/employment to explain regional disparities within and between the EU countries. The paper finally and most innovatively points out the prominent role of trade network connections to understand regional inequalities in the EU over time and across sectors. This is shown to be relevant and increasing in time. The analysis calls for policies targeting national and regional productivity with the aim of limiting spatial polarization. This is essential because trade linkages, i.e. integration, are an essential determinant of disparities patterns in the EU.