The geography of inequalities in Europe Philippe Martin ... - ENPC

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though it may not be the most efficient way to do this. Work by Duranton and Monastiriotis(2002) and Gobillon (2002) however suggest that this is only partially the case. The first paperuses data on average regional earnings in UK during the 1982-1997 period. It shows a worseningof UK regional inequalities and a rise in the North-South gap. However, differences in educationaccount for most of the aggregate divergence. London gained because its workforce becamerelatively more educated over the period. Second, returns to education increased nation-wide,which favoured the most educated regions (i.e., London). Third, returns to education wereinitially lower in London but they (partially) caught up with the rest of the country. Had returnsto education and their distribution across UK regions remained stable over the period, the UKNorth-South divide would have decreased.Gobillon (2002) uses individual French data on wages to quantify the determinants oflocal disparities in wages during the 1978-1990 period. He finds that two thirds of regionalinequalities in wages is explained by the individual characteristics of the workers; in particularhis or her level of education. Of course this leaves one third unexplained but this is the maximumthat geographical factors could account for.These two studies suggest that a major reason for the increase in regional inequalitiesinside European countries may not have much to do with geography of production per se. Ifreturns to education have increased since the 1980s, which most labour economists believe, thenthe increase in regional inequality is at least partially a consequence of the increase in individualinequalities itself caused by the increase in the return to education. A plausible story is thatinitially rich regions were well endowed with workers with high levels of education so that theincrease in regional disparities in GDP per capita reflected the association of a general increasein the return to education and the initial geographical disparity in education levels. Furthermore,it is well known that better educated workers are more mobile so that they may haveconcentrated in the richer regions too.Can regional policies increase social inequalities?The type of instrument used by regional policies also has important implications for thelink between individual inequalities and regional inequalities. Most countries subsidizeinvestment rather than employment at the regional level and this translates into subsidies tocapital rather than labor (see Yuill et al, 1997, and Fuest and Huber, 2000). An important
example is the subsidy program provided to Eastern Germany. According to Fuest and Huber(2000), 90% of the subsidies to firms locating in Eastern Germany take the form of investmentsubsidies. At the European level, more than 400 types of subsidies exist that can help firms inpoor regions. They take so many forms that it seems quite safe to characterize them as acomplicated mix of subsidies to capital and labor.Regional policies consisting of subsidising industries so as to give them an incentive torelocate in disadvantaged regions may have perverse effects on individual inequalities. If capitalis mobile, subsidising the return on that capital in one region amounts to increasing its return inall regions. The reason is that if the return to capital is higher in one region than in another, in thelong term, delocation will take place until the returns are equalised (see Dupont and Martin,2003). Regional policies that subsidise capital in poor regions may actually imply transfers fromthe poor to the rich region as the increase in the return to capital will benefit the region with thehighest share of capital ownership. Hence, even if they succeed in reducing regional inequalities,such subsidies to capital can thus end up increasing inequalities between individuals. This ismaybe an extreme scenario but it serves as a reminder that the choice of instruments used byregional subsidies is extremely important.To sum up, a large share of regional inequalities come from individual inequalitiesthemselves produced by individual characteristics, in particular differences in the educationlevel. This implies that regional policies that offer subsidies to firms that locate in poor regionsor that finance infrastructure projects in those regions may only have limited effects on regionalinequalities and that policies that concentrate on education may be more efficient.VI. ConclusionsPublic economic intervention must be based either on efficiency or on equity considerations.This paper has argued that the legitimacy of regional policies in Europe is not strong on eitherground. A major rethink is required, based on simple principles in economics. On the efficiencymotive, we have argued that increasing returns, which explains spatial economic concentration,also point to the efficiency gains of this process. Recent econometric evidence shows, in theEuropean context, that these gains should be taken into account when defining regional policies.
Page 7 and 8: average the regional inequality in
Page 9 and 10: in the three regions, or in only on
Page 11 and 12: Overall, this example suggests that
Page 13 and 14: appears (see Martin 1999a, b and Ba
Page 15 and 16: convergence towards the rest of the
Page 17 and 18: each earn 5.5 and 80% 1.5 so that t
Page 19: Table 2: Income inequality and spat
Page 23: - Dupont V. and P. Martin, 2003,

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