Does labour productivity flow across industries? Estimation robust to panel heterogeneity and cross sectional correlation

Abstract

We consider labour productivity convergence between the United States and the United Kingdom and France, using industry level data. We find evidence of panel heterogeneity, cross sectional correlation and weak evidence of productivity convergence at the industry level.

Acknowledgements

The authors wish to thank Ray Barrell, Julia Darby, Richard Harris, Ian Marsh, James Mitchell, Charles Nolan, Ron Smith, Patrick Sevestre, Martin Weale and other seminar participants at NIESR, Paris XII and the Scottish Economic Society Conference. All errors and omissions are the sole responsibility of the authors.

Notes

¹ An exhaustive review of the convergence debate can be found in Islam (2003).

² Even when there is not rank deficiency of the covariance matrix SUR assumes that factors that induce residual cross sectional correlation are independent of the regressors (Smith and Fuertes, 2004).

³ Under the null of the Hausman test, FE estimation is consistent and more efficient (cross sectional homogeneity), whilst under the alternative the FE estimator is biased due to cross sectional heterogeneity and RCM estimates are more appropriate.

⁴ It is worthwhile noting that Phillips and Moon (1999) suggest that spurious regressions problems are much reduced in a panel setting due to cross sectional averaging.

⁵ Crafts and O'Mahony (2001) suggest that France has converged at an aggregate level with the United States in terms of labour productivity per hour worked whilst there is evidence of a substantial gap between the United States and the United Kingdom. Our results are generally consistent with this evidence.

⁶ For example, Bernard and Jones (1996) use a sample of 6 industries for 14 OECD countries, while Funk and Strauss (2003) study is based on 21 industries in 16 OECD countries.

⁷ It should be noted that we impose a cointegrating vector of one in each case.

Table 2. Second generation panel unit roots