Labour productivity disparities in European regions: the impact of agglomeration effects

Abstract Disparities in regional productivity in Europe have increased since 2000, and the rapid progress of the richest regions is considered to be one of the main forces behind this change. In this paper, we estimate a production function, taking into account spatial dependence where labour productivity depends on regional capital intensity, knowledge-related variables (human capital and patent intensity) and the presence of agglomeration economies. The data cover a set of 121 NUTS-2 regions belonging to nine European countries over the period 2000–2014. Our econometric analysis throws up new and robust evidence pointing to the positive total impact of agglomeration on regional levels of labour productivity. We find that the positive externalities deriving from agglomeration are significant only in the region itself (direct impact), while the physical and human capital exhibit direct positive effects that are partially counterbalanced by the presence of negative spatial spillovers. But, while physical capital per worker preserves a significant positive total effect, the human capital does not. Finally, we find that knowledge generation impacts directly in local labour productivity and spread out significantly to other regions. These results are used to propose a more balanced use of regional policies to propel territorial resources in order to compensate the dominance of agglomeration economies.