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Regional Studies, 2013

Vol. 47, No. 10, 1686–1700,

Localized Technological Change and Efficiency

Wages across European Regional Labour Markets
*Bureau of Research in Innovation, Complexity Knowledge (BRICK), Collegio Carlo Alberto, Via Real Collegio, 30,
I-10024 Moncalieri (Turin), Italy
†Dipartimento di Economia ‘S. Cognetti de Martiis’, Università di Torino, Via Po, 53, I-10124 Turin, Italy
‡Groupe de Recherche en Droit, Economie et Gestion (GREDEG), CNRS and University of Nice Sophia Antipolis,
250, rue Albert Einstein, F-06560 Valbonne, France. Email:

(Received February 2010: in revised form April 2012)

ANTONELLI C. and QUATRARO F. Localized technological change and efficiency wages across European regional labour markets,
Regional Studies. Internal labour markets and industrial relations in Continental Europe are characterized by substantial rigidity of
employed labour engendered by the tight conditions of regional labour markets. This rigidity affects both the rate and the direction
of technological change. The increase of wages induces the localized introduction of biased technological change with clear effects
on productivity levels. The empirical evidence across a sample of European regions confirms the significant role of the changes in
wages both on the increase of the output elasticity of labour and on multifactor productivity.

Induced approaches Localized technological change Efficiency wages Multifactor productivity growth
Regional labour markets

ANTONELLI C. and QUATRARO F. 欧洲区域劳动市场的在地化技术变革与效率工资,区域研究。欧陆的内部劳动市场

方向。工资增加引发采用在地化的偏向技术变革(biased technological change),并在生产率层面有着明确的影响。样

引导方法(Induced approaches) 在地化的技术变革 效率工资 多要素生产率成长 区域劳动市场

ANTONELLI C. et QUATRARO F. La mutation technologique localisée et les salaires efficients à travers les marchés du travail régio-
naux d’Europe, Regional Studies. Les marchés du travail internes et les relations industrielles en Europe continentale se caractérisent
par une rigidité de l’emploi suscitée par les tensions sur les marchés du travail régionaux. Cette rigidité touche à la fois le rythme et
l’orientation de la mutation technologique. L’augmentation des salaires provoque le développement localisé de la mutation tech-
nologique systématique, avec des effets manifestes sur les niveaux de productivité. Les preuves empiriques auprès d’un échantillon
de régions d’Europe confirment le rôle essentiel de l’évolution des salaires à la fois quant à la hausse de l’élasticité de l’emploi par
rapport à la production et pour ce qui est de la productivité multifactorielle.

Approches provoquées Mutation technologique localisée Salaires efficients Croissance multifactorielle de la productivité
Marchés du travail régionaux

ANTONELLI C. und QUATRARO F. Lokalisierte technologische Veränderungen und Effizienzlohn in verschiedenen regionalen
Arbeitsmärkten Europas, Regional Studies. Die internen Arbeitsmärkte und Arbeitsbeziehungen in Kontinentaleuropa zeichnen
sich durch eine erhebliche Rigidität der eingestellten Arbeitskräfte aufgrund der strengen Bedingungen der regionalen Arbeits-
märkte aus. Diese Rigidität wirkt sich sowohl auf die Geschwindigkeit als auch auf die Richtung der technologischen Verände-
rungen aus. Die Lohnerhöhungen führen zu einer lokalisierten Einführung ungleichmäßiger technologischer Veränderungen mit
klaren Auswirkungen auf das Produktivitätsniveau. Die empirischen Anzeichen in einer Stichprobe von europäischen Regionen
bestätigen die signifikante Rolle der Veränderungen bei den Löhnen auf die Verstärkung der Produktionselastizität der Arbeits-
kräfte sowie auf die multifaktorielle Produktivität.

Induzierte Ansätze Lokalisierte technologische Veränderungen Effizienzlohn Multifaktorielles Produktivitätswachstum

Regionale Arbeitsmärkte

ANTONELLI C. y QUATRARO F. Cambio tecnológico localizado y salarios de eficiencia en los mercados laborales regionales en
Europa, Regional Studies. Los mercados laborales internos y las relaciones industriales en Europa continental se caracterizan por
una rigidez considerable de la población activa ocupada, generada por las condiciones estrictas de los mercados laborales regionales.

© 2013 Regional Studies Association
Localized Technological Change and Efficiency Wages across European Regional Labour Markets 1687
Esta rigidez afecta tanto a la tasa como a la dirección del cambio tecnológico. El aumento de los salarios conduce a la introducción
localizada de un cambio tecnológico sesgado con efectos claros en los niveles de productividad. La evidencia empírica en una
muestra de regiones europeas confirma el papel significativo de los cambios salariales tanto en el aumento de la elasticidad de la
producción del mercado laboral como en la productividad multifactorial.

Enfoques inducidos Cambio tecnológico localizado Salarios de eficiencia Crecimiento de la productividad

multifactorial Mercados laborales regionales

JEL classifications: O33, R11

INTRODUCTION analytical effort because it provides an empirical

setting, characterized at the same time by the combi-
The empirical evidence across Europe shows that sub- nation of low levels of unemployment and the strong
stantial changes have been taking place in the direction bargaining power of organized labour, and the fast
of technological change in the last decade. Technologi- pace of introduction of LTCs directed towards the
cal change has been far from neutral; actually it exhibits a intensive use of labour, that can be appreciated in a
strong variance across European regions with a bias comparative context.
towards the introduction of labour-intensive technol- This paper therefore articulates an empirical setting
ogies in core regions characterized by low levels of linking factor markets’ conditions to the dynamics of
unemployment and the reverse in peripheral regions technological change. In this direction it contributes
with higher levels of unemployment. The analysis of also to the more general debate on the relationships
the conditions of European labour markets and more between innovation and employment. The traditional
generally the identification of the irreversibility of pro- literature on this subject is indeed focused on the analysis
duction factors provides useful insights to understand of the effects of technological innovation on unemploy-
the rate and the direction of technological change. In ment, emphasizing the positive impact of innovation,
Continental Europe labour markets internal to firms and in particular product innovation, on employment
are characterized by substantial rigidity: firms face levels (FREEMAN and SOETE , 1987, 1994; VIVARELLI
major limitations in the adjustment of employment and PIANTA , 2000; PIVA and VIVARELLI , 2005).
levels to the changing conditions of both the demand However, there has been scarce attention to the
levels and the relative costs of inputs. Such limitations reverse relationship, that is, to the effects that labour
are stronger the lower the levels of unemployment in markets conditions may have on firms’ incentives to
regional labour markets. As a matter of fact, the con- introduce directed technological change. The articula-
ditions of the European labour markets, both external tion of an LTC framework is thus far reaching as it
and internal to firms, are such that a new stylized fact allows this gap to be filled and it sheds a new light on
can be introduced: both capital and labour, the basic such complex dynamics.
production factors, are rigid as they reflect the high The rest of the paper is structured as follows. The
levels of employment in external labour markets. second section frames the analysis and presents a
These rigidities affect both the rate and the direction model of LTC-cum-efficiency wages. The third
of technological change and account for the introduc- section provides some descriptive evidence upon the
tion of new labour-intensive technologies induced by direction of technological change across European
the dynamics of wages with strong and positive effects regions in the years 1999–2004 and it presents the
on total factor productivity. econometric tests of the model elaborated in the
This paper aims at elaborating a model of localized second section. The conclusions summarize the main
technological change (LTC) that builds upon and yet results and put them in perspective.
contrasts the induced technological change tradition to
analyse the determinants of the direction of technologi-
cal change and to identify its effects on productivity
growth. The results support the idea that LTC is intrin-
sically biased towards the increased efficiency of the pro-
duction factor that is becoming relatively more
expensive. Specifically, when wages increase, and the
irreversibility of production factors localizes and con-
straints the innovation process in a limited technical The induced technological change approach is back at
space, the direction of technological change is skill the centre stage of the economics of technological
biased. change, revived by the skill-bias debate that has
The empirical evidence of regional labour markets in brought new interest in the bias of technological
Continental Europe in the years 1995–2004 stirs the change as the result of the changes in factor prices
1688 Cristiano Antonelli and Francesco Quatraro
(RUTTAN , 1997, 2001). The contributions of ACEMO- defined on factor markets, so that w and r are, respect-
GLU (1998, 2002) have revived recently the analysis of ively, the unit cost of labour and capital services in
the endogenous generation of directed technological region i at time t. The solution to the cost minimiz-
change showing how innovations are aimed at making ation problem, after total differentiating equation
a more intensive use of human capital inputs that are (1), is given by the well-known condition:
becoming more abundant.
The LTC framework shares the basic view that the wi,t bi,t Ki,t
changes in factor costs are the causal factor of the intro- = (2)
ri,t ai,t Li,t
duction of innovations, yet it articulates a specific variant
as it argues that when factor prices change and standard Thus, in equilibrium relative prices must be pro-
factor substitution is impeded by the substantial irrever- portional to the ratio between labour productivity
sibility of inputs, the inducement mechanism can lead to and capital productivity. It is now assumed that a com-
the introduction of technologies with a bias towards the pensated change in factors costs takes place, for
more intensive use of the rigid factors that are becoming example a reduction in the relative price of capital.
more expensive (ATKINSON and STIGLITZ , 1969; This in turn translates into an increase (in absolute
ANTONELLI , 1995). value) of the slope of the isocost line. The new
In a context characterized by substantial rigidity of isocost would define a new equilibrium point that is
labour inputs the notion of efficiency wages becomes characterized by a new combination of capital and
relevant for assessing the rate and the direction of labour in the production process. In this standard fra-
LTC. The increase in wages-cum-labour rigidity in mework, the change in relative prices fully burdens
fact impedes the movements on the existing map of iso- the capital/labour ratio, as the technology is exogen-
quants and hence limits the traditional substitution of ous by definition. The analytical translation of this
capital to labour. Firms can cope with the increased line of reasoning can be obtained by rearranging the
levels of wages only if they introduce LTC that makes relationship in equation (2) as follows:
the existing employment more productive. This
outcome is all the more plausible if and when efficiency
wi,t bi Ki,t
wages actually enhance the commitment of employees = (3)
to contribute the innovative efforts of their firms. The ri,t ai Li,t
tacit competence accumulated by means of learning
processes can be valorized and codified. Efficiency where the bars over output elasticities signal that they
wages, in other words, induce more than the solution are constant over time. By taking logs of both sides,
of organizational failures: they actually induce the intro- and then first-differences, the following is yielded:
duction of technological changes biased towards higher    
levels of labour intensity (AKERLOFF and YELLEN , w  b K
d log dt = d log dt + d log dt (4)
1986; SHAPIRO and STIGLITZ , 1984). r a L
In view of the arguments elaborated so far, the
authors propose a simple model of LTC in which In other words, the growth rate of relative prices
innovation efforts stimulated by changes in the equals the sum of growth rates of capital intensity
relative price of inputs are not directed to substitute and of the ratio between labour and capital output
the factors that became more expensive and elasticities. However, by definition:
hence to increase the output elasticity of the other
complementary inputs – as in the induced technologi-  
cal change tradition. In opposition, LTC is character- d log dt = 0
ized by a bias towards the increase of the output
elasticity of the rigid factors that are becoming more
expensive. The section starts with a general Cobb– and therefore equation (4) boils down to:
Douglas production function, representing the actual w   
technology by means of which regions transform K
d log dt = d log dt (5)
inputs into outputs: r L

a b The main argument of this paper is that changes in

Yi,t − Ai,t Ki,ti,t Li,ti,t (1) relative prices engender directed changes in the
production technology, as long as switching costs
The output produced in region i at time t is a function are relevant and firms are better off by adjusting to
of the actual levels of capital and labour employed, and new relative prices by reshaping the technology
of the actual technology signalled by the general effi- instead of changing the capital/labour ratio.
ciency parameter A and by factors’ output elasticities. The extreme version of the argument would main-
Production factors are available at equilibrium prices tain that firms choose to bear only innovation costs
Localized Technological Change and Efficiency Wages across European Regional Labour Markets 1689
and avoid all factor substitution. This situation is factor, with the notion of technological congruence
exactly opposite to that represented in equation (5) elaborated by ABRAMOVITZ and DAVID (1996). The
below. When wages increase, firms, in order to LTC hypothesis retains the Hicks–Ruttan assumption
remain in the proximity of the original factor inten- according to which technological change is induced
sity, because of the rigidity of labour, have a clear by changes in factor markets, but shows that the
incentive to introduce new technologies and direct direction of technological change is exactly the oppo-
them towards a more intensive use of their labour site with respect to the induced technological change
inputs, and hence an increase in β, that, assuming approach as it is biased in favour of the factor that has
constant returns to scale, implies a reduction of α. become relatively more expensive.
In this framework firms cannot change either capital Specifically, if it is acknowledged that the rigidity of
or labour because of the significant switching costs that labour, in internal labour markets, reflects the relative
make the capital/labour ratio fixed. To hold true the scarcity of labour, in regional labour markets, as
identity in equation (5), the ratio between labour and measured by low levels of unemployment, the LTC
capital output elasticities must change accordingly. hypothesis can be fully articulated according to which
This amounts to spelling out the hypothesis that in the localized introduction of technological change,
contexts where both production factors K and L are stirred by the increase in wages, and supported by the
irreversible, technological change is induced by valorization of the tacit competence of incumbent
changes in relative factor prices and directed towards workers, is directed towards the augmentation of the
the modification of the slope of the isoquant through output elasticity of the existing labour inputs that are
the change of the ratio between output elasticities β locally more scarce and hence more rigid so as to
and α. favour employment levels.
From an analytical viewpoint, equation (2) is to be The localized introduction of labour-intensive
rewritten as follows: technologies is likely to have much a stronger effect
on the multifactor productivity (MFP) than the
wi,t bi,t Ki induced introduction of capital-intensive technologies
= (6) because: (1) labour-biased technological change
ri,t ai,t Li
impinges upon the higher intensity of knowledge gen-
eration based upon learning processes and the accumu-
where the bars over capital and labour levels signal lation of competence stirred and sustained by efficiency
that they are both necessarily fixed because of irrever- wages, and a prevalence of product innovations that
sibility and switching costs. By taking logs of both rely upon higher levels of participation of skilled
sides, and then first-differences, one yields again the manpower in non-standardized production processes;
relationship in equation (4). However, in this case and (2) capital-intensive technological change is more
by definition: likely to reflect the adoption of new vintages of
  capital goods embodying technological knowledge
K generated by upstream industries better able to appro-
d log dt = 0
L priate large shares of productivity-enhancing effects
and the equation can be rewritten as follows: COLOMBELLI , 2011).
In view of the argument elaborated so far, the authors
w    will now spell out the leading working hypotheses
d log dt = d log dt (7) underlying the paper.
r a Technological change is far from neutral. Firms are
constrained by both static and dynamic irreversibilities
In this extreme situation, characterized by high levels within a limited portion of the technical space, in the
of factor irreversibility, a change in relative prices surrounding of the original technique defined in terms
induces the localized introduction of biased techno- of the capital/labour ratio characterizing their pro-
logical change that affects the ratio between labour duction process. In a frictionless world, a compensated
and capital output elasticities such that the output change in factor markets conditions would engender a
elasticity of the production factor that has become costless adaptation of firms to the new relative prices
more expensive will increase. As a consequence the by just changing the proportions between capital and
use of labour is sticky in absolute terms. This result labour so as to move upon the original isoquant.
contrasts with the traditional induced technological However, the acknowledgement of the crucial role of
change approach, where the increase of wages irreversibilities makes it necessary to take account of
would lead to a reduction in the use of labour. the switching costs.
This is fully consistent with the efficiency wages The irreversibility of labour within firms is strictly
argument and, at least in advanced regions where dependent upon the conditions of local labour
human capital is becoming the most abundant markets. In regions characterized by high levels of
1690 Cristiano Antonelli and Francesco Quatraro
unemployment, trade unions are weaker and hence The discrete approximation of annual growth rate of
much less able to contrast the standard substitution of MFP in region i at time t is then calculated in a tra-
labour with capital. In such regions the increase of ditional way as follows:
unit wages would induce the introduction of capital-
intensive technologies, as in the induced technological MFPi (t ) Yi (t )  
change tradition. In regions characterized by full ln ; ln − 1−b
MFPi (t − 1) Yi (t − 1)
employment, on the opposite, internal and external  
labour markets are much more rigid and all changes in Ki (t )
× ln
the levels of employment, at the firm level, bear high Ki (t − 1)
levels of switching costs. In these regions firms cannot  
Li ( t )
substitute easily capital to labour. The introduction of − b ln (10)
Li ( t − 1 )
LTC biased towards high levels of labour output elasti-
cities becomes the most effective, if not the single, way
to cope with the increase in unit wages. In sum, it is where the bars over output elasticities, following the
argued that the levels of employment have a strong posi- discrete approximation of the Divisia index, refer to
tive effect on the working of the inducement mechan- the two years’ average of both α and β. In so doing
ism. The levels of employment affect directly and one can appreciate to some extent the effects of the
positively the localized introduction of new, more change in output elasticity on the difference between
labour-intensive technologies in response to an increase the expected output and the actual one, that is, the
in unit wages. residual (ANTONELLI and QUATRARO , 2010).
Because of the central role of efficiency wages in the Following the hypotheses spelled out in the previous
valorization of learning processes, in the consequent section, the authors now propose the structural specifi-
generation of technological knowledge and introduc- cation to be estimated in the econometric analysis. The
tion of product innovations, the localized introduction basic hypothesis proposes that a change in relative prices
of labour-intensive technologies is likely to exert posi- of production factors engenders a change in output elas-
tive effects on the growth of total factor productivity ticities as a consequence of intentional efforts towards
that are stronger the more abundant is human capital the localized introduction of technological change.
in the region. This leads to a modelling of the growth rate of output
elasticities as a function of relative prices. In addition,
it must be stressed that LTC stems from the commit-
ment of resources to innovation activities. Therefore, a
METHODOLOGY AND DATA proxy for innovation dynamics needs to be inserted in
Estimation model and econometric procedures the specification. Finally, because of the relevance of
regional labour markets, the effects of unemployment
In order to grasp the effects of the localized and induced are also considered. Indeed, the unemployment rate
technological change on factors’ output elasticities and plays a key role as it shapes the extent to which trade
eventually on productivity, one first needs to calculate unions may exert their bargaining power so as to
proxies of relative prices, output elasticities and make production factors irreversible. Hence, standard
multifactor productivity (MFP). To this purpose this textbook macroeconomics suggests that the lower the
section follows a standard growth-accounting level of unemployment, the stronger the power of
approach (SOLOW , 1957; JORGENSON , 1995; trade unions. In such a context, if wages increase,
ORGANISATION FOR ECONOMIC CO-OPERATION firms will be pushed to introduce technological
AND DEVELOPMENT (OECD), 2001). It starts by
change directed towards a more effective use of labour
assuming that the regional economy can be represented by increasing its output elasticity β, and hence reducing
by a general Cobb–Douglas production function with α. In view of this, the baseline econometric specification
constant returns to scale as in equation (1). is the following:
Following Euler’s theorem, output elasticities have
been calculated (and not estimated) using accounting    
ai,t wi,t−1
data by assuming constant returns to scale and perfect ln = a + b ln ai,t−1 + c1 ln
competition in both product and factors markets. The ai,t−1 wi,t−2

output elasticity of labour has therefore been computed Ui,t

as the factor share in total income: + c2 ln   + ri + Sct
Ui,t + Ei,t
bi,t = wi,t Li,t /Yi,t (8) + 1i,t (11)

ai,t = 1 − bi,t (9) where the error term is decomposed in ρi and Σψt, which
are, respectively, region and time effects; and εit is the error
where w is the average wage rate in region i at time t. component. The growth rate of capital output elasticity
Localized Technological Change and Efficiency Wages across European Regional Labour Markets 1691
(α) is regressed against its lagged level, so as to control for where MFP is multifactor productivity; α is capital
possible mean reversion effects, the growth rate of real output elasticity; and TC is the number of patent appli-
unit wages (w), and the unemployment rate (U/U + E) cations per 1000 workers.
by region i. Equation (11) can be estimated using Equations (12) and (13) can be estimated through
traditional panel data techniques implementing the traditional fixed-effect estimators for panel data.
fixed-effect estimator. However, when analysing the determinants of total
Moreover the introduction of a few control vari- factor productivity growth at the regional level, a
ables helps the dynamics of the process to be special focus must be devoted to locational aspects.
grasped. First, the effect of agglomeration economies Regional scientists have indeed showed that geo-
needs to be accounted for, as it can affect the dynamics graphical proximity may affect correlation between
of internal factors’ markets by influencing the relative economic variables.
supply of labour. The traditional proxy present in While the traditional econometric approach has
the literature, that is, the population density (D) per mostly neglected this problem, a new body of
square kilometre (QUATRARO , 2010), was used. literature has recently developed, dealing with the
Second, the relative regional specialization in manufac- identification of estimators able to account for both
turing industries (S) can also affect the results of the spatial dependence between the relationships
estimations because of the different mix of industries between observations and spatial heterogeneity in
(QUATRARO , 2009), and it therefore needs to be the empirical model to be estimated. Former treat-
included in the econometric model, which turns out ment of spatial econometric issues can be found in
now to be the following: ANSELIN (1988), subsequently extended by LE SAGE
ai,t wi,t−1
ln = a + b ln ai,t−1 + c1 ln The idea behind the concept of spatial dependence
ai,t−1 wi,t−2
is straightforward. The properties of economic and
Ui,t social activities of an observed individual are likely to
+ c2 ln   influence economic and social activities of neighbour
Ui,t + Ei,t
    individuals. Formally this relationship can be expressed
+ c3 ln Di,t−1 + c4 ln Si,t−1 + ri as follows:
+ Sct + 1i,t (12)
The localized introduction of technological change yi,t = h yj,t , i = 1, . . . , n, j=i (14)
enables efficiency gains with respect to the labour
inputs when these become more expensive, and there-
fore allows one to compensate for the change in relative
prices with a change in the marginal rate of technical The dependence can therefore be among several
substitution between production factors. observations. If this is the case, structural forms like
Moreover, in line with the third hypothesis spelled equation (12) are likely to produce a bias in the esti-
out in the second section, by introducing biased tech- mation results. There are different ways to cope with
nologies, firms can generate fully fledged technological this issue. First, spatial filters may be applied to the
innovations that also engender an increase in the sample data so as to remove the spatial structure and
general efficiency of the production process. The then traditional estimation techniques applied.
exploitation of learning dynamics and knowledge Second, the relationship can be reframed using a
accumulation stimulated by the dynamics of efficiency spatial error model (SEM), in which the error term
wages may indeed engender innovation efforts which is further decomposed so as to include a spatial auto-
are not limited to the production technology, but correlation coefficient. Third, the spatial autoregressive
involve also the organization and the product portfolio. model (SAR), which consists of including the spatially
In view of this, the localized introduction of technologi- lagged dependent variable in the structural equation,
cal change is likely to exert significant effects on the may be applied.
growth of multifactor productivity. In order to test It was decided to compare the SAR and SEM
this hypothesis, the following econometric specification models in order to have a direct assessment of the
is adopted: spatial dependence of productivity growth between
  close regions. However, most of the existing literature
MFPi,t   on spatial econometrics proposes estimator appropriate
ln = z + g ln MFPi,t−1
MFPi,t−1 for cross-sectional data. Given the panel data structure
of the sample, this paper therefore follows ELHORST
+ h ln ai,t−1 + m ln TCi,t−1
(2003) by extending equation (12) so as to obtain
+ ri + Sct + 1i,t (13) the SAR (equation 15) and the SEM (equation 16)
1692 Cristiano Antonelli and Francesco Quatraro
specifications: labour and capital shares were needed. As a measure
of output (Yit) the real gross domestic product
ai,t ai,t (GDP) (2000 constant prices) was used. Eurostat
ln = zH ln + b ln ai,t−1 also provides an estimation of capital stock (Kit) and
ai,t−1 ai,t−1
employment, although it does not provide data
+ cXi,t−1 + ri + Sct + 1i,t (15) about hours worked at the regional level. For this
  reason, average hours worked at the country level,
ai,t provided by the GRONINGEN GROWTH AND DEVEL-
ln = b ln ai,t−1 + cXi,t−1 + ri + Sct 2
OPMENT CENTRE , were used and then the total
hours worked (Lit) were calculated. Although
+ 1i,t + ft (16) this does not allow cross-regional difference in
    average hours worked to be appreciated, nonetheless
ft = dH ft + mt , E mt = 0, E mt mt = s2 IN it allows one to account at least for cross-country
differences. The labour share (βit) is calculated
Equation (13) is also extended so as to obtain the SAR using data on the compensation of employees and
(equation 17) and the SEM (equation 18) specifications: the GDP according to equation (8), while capital
output elasticity was then calculated following
    equation (9).
MFPi,t MFPi,t
ln = cH ln The data on the unemployment rates across
MFPi,t−1 MFPi,t−1
European regions, as well as those concerning popu-
+ d ln MFPi,t−1 + eZi,t−1 + rt lation density, the total regional value added and the
+ Sct + 1i,t (17) regional value added in manufacturing industries, were
drawn by the Eurostat regional statistics.
  For what concerns the role of formalized innovation
ln = b ln MFPi,t−1 + eZi,t−1 + rt efforts in the localized introduction of technological
MFPi,t−1 change, it was decided to use patent applications to
+ Sct + 1i,t + ft (18) the European Patent Office (EPO) as proxies of
regional innovative activities. The time series provided
    by the EPO start in 1978, and it assigns patents to
ft = dH ft + mt , E mt = 0, E mt mt = s2 IN regions according to inventors’ addresses. The limits
of patent statistics as indicators of innovation activities
where X and Z are the vectors of regressors; ξ and ψ are are well known. The main drawbacks can be summar-
referred to as spatially autoregressive coefficients; φ is the ized in their sector specificity, the existence of non-
spatial component of the error model; and H is a patentable innovations and the fact that they are not
weighting matrix. This latter can be defined either as a the only protecting tool. Moreover the propensity to
contiguity or as a normalized distance matrix. In the patent tends to vary over time as a function of the
analysis that follows the second alternative is chosen cost of patenting, and it is more likely to feature
by building a symmetric matrix reporting the distance large firms (PAVITT , 1985; LEVIN et al., 1987;
in kilometres among the city centre of the regional GRILICHES , 1990).
chief towns. Nevertheless, previous studies highlighted the use-
fulness of patents as measures of production of new
knowledge, above all in the context of analyses of
innovation performances at the aggregate regional
level (ACS et al., 2002). Besides the debate about
In order to investigate the relationships between patents as an output rather than an input of innovation
changes in factor markets, directed technological activities, empirical analyses showed that patents and
change and MFP, the authors have drawn data from research and development (R&D) are dominated by a
the Eurostat regional statistics, which gather together contemporaneous relationship, providing further
statistical information regarding European regions support to the use of patents as a good proxy of
since the year 1995. Due to data constraints, the econo- innovation (HALL et al., 1986). Table 1 reports the
metric exercise is focused on a balanced sample of correlation matrix for the variables considered in the
NUTS-II (Nomenclature des Unités Territoriales empirical estimations. It shows that, on the whole,
Statistiques) regions across different European countries, the pairwise correlations across regressors are generally
that is, Austria, Belgium, Germany, Spain, Finland, low, casting away any concern of multicollinearity.
France, Italy, Hungary, Poland and United Kingdom There is only a relative high coefficient for what con-
over the period 2000–2004.1 cerns the relationship between D and S. This would
For what concerns the calculation of the MFP suggest that one separately checks for their effects on
index, output, labour and capital services, and the the growth rate of α.
Localized Technological Change and Efficiency Wages across European Regional Labour Markets 1693
Table 1. Correlation matrix
log(αt/αt−1) log(αt−1) log(wt−1/wt−2) log[Ut/(Et + Ut)] log(TCt−1/TCt−2) log(Dt−1) log(St−1)

log(αt/αt−1) 1
log(αt−1) −0.0978 1
log(wt−1/wt−2) −0.3670 0.1319 1
log[Ut/(Et + Ut)] −0.0600 −0.1071 −0.0015 1
log(TCt−1/TCt−2) 0.0482 0.0380 0.0264 −0.0385 1
log(Dt−1) 0.1033 −0.1989 −0.0654 −0.0472 0.0006 1
log(St−1) 0.0303 0.0435 −0.0333 −0.4709 0.0373 −0.2981 1

Figs 1–3 provide a preliminary statistical description are still quite significant. Most Eastern Europe regions
concerning both the distribution of regions across differ- can be found in this class, along with Central and
ent values of capital output elasticity and the change of Southern Italy, and central Spain. The median class,
such distribution over time. roughly centred on 0.5, comprises some Spanish and
Fig. 1 shows the kernel density estimation for the dis- French regions, as well as all Austrian regions and a
tribution of sampled regions over capital output elas- few from Southern Germany. The two lowermost
ticity for two periods. The continuous line refers to classes finally include the core regions such as all the
the period 1995–2003, while the dashed line refers to UK regions, Northern France and the bulk of German
the period 2000–2003. This evidence conveys impor- regions.
tant information. First of all, there is a wide dispersion A sharp partition emerges from this picture. North
of regions across different levels of capital elasticities. European regions indeed appear to be characterized
These are far from homogeneous, and both distributions on average by fairly low levels of capital output elas-
show the existence of more than one peak. Moreover, ticity, and hence by high levels of labour output elas-
and more importantly, the distribution changes over ticity. This supposedly reflects the employment
time. The shape of the dashed line appears to be fairly conditions of the regional labour markets that make it
different from that the continuous line. This means convenient to direct LTCs towards the introduction
that overall the output elasticity of capital changed of labour-augmenting innovations. This is likely to be
over time. The prominent peak around 0.6 suggests related, above all in the case of France, the UK and
that on average the capital share in national income Norway, to the actual change in industrial structure,
increased in the early 2000s with respect to the second characterized by the increasing weight of service sectors
half of the 1990s. and the increasing supply of qualified work. On the
Fig. 2 shows the distribution of sampled regions contrary, in peripheral southern regions, the persistent
across capital output elasticities.3 It is evident that the specialization in traditional manufacturing industries and
range of variation is quite large, falling in the interval higher levels of unemployment with the consequent
[0.372, 0.758]. The darkest areas are those characterized lower bargaining power of trade unions and hence
by the highest values of α. Regions belonging to this lower levels of rigidity in internal labour markets and
group can be found in Northern Italy, in Greece, factor irreversibility favour the working of the traditional
mainly in Poland and in Southern Portugal. The dark induced technological change mechanisms so as to make
grey areas are at a lower level of output elasticity, but capital output elasticity higher than that of labour.
Fig. 3 shows the dispersion of capital output elas-
ticity over time for each region. Also in this case,
darker regions are those in which the variation over
time is higher. The highest variance can be found in
Greece, while lower levels are observed in Eastern
European regions, Portugal, Corsica and Campania in
Italy. Some degree of variation can also be observed
in Italian, French and UK regions, while most of
German and Spanish regions are characterized by
basically stable output elasticities over time. It is
worth stressing that the quite heterogeneous picture
resulting from this descriptive exploration reveals that
the time stability of output elasticities, and therefore
parallel shifts of the production function, is possible
but not necessary. On the contrary, different regions
may also be characterized by higher or lower variation
Fig. 1. Kernel density estimation for capital output elasticity of output elasticities.
1694 Cristiano Antonelli and Francesco Quatraro

Fig. 2. Average levels of α, by region

ECONOMETRIC RESULTS: of both capital and labour, positively associated with

DETERMINANTS AND EFFECTS OF LTC levels of unemployment in regional labour markets,
firms are induced to introduce LTC directed towards
This section provides the results for the econometric a more effective use of labour.
estimations. Table 2 reports the fixed-effect estimations Therefore, if wages increase, in a context shaped by low
of equation (12). This aims at assessing the effects of levels of unemployment, labour output elasticity is
changes of factor costs on factors’ output elasticity, so expected to increase and, hence, assuming constant
as to test the first and main hypothesis concerning the returns to scale, capital output elasticity is expected to
localized inducement of technological change. fall. The results shown in column (1) are fully in line
Column (1) of Table 2 shows the baseline model, with this proposition. The coefficients of the growth rate
wherein the growth rate of capital output elasticity (α) of wages and unemployment are indeed both significant,
is regressed against the growth rate of unit labour cost being the former negative and the latter positive.
and the unemployment rate, while the lagged value of Column (2) shows the result of the estimation of the
α is meant to capture possible mean reversion effects. baseline enriched by the inclusion of the effects of agglom-
The main hypothesis proposes that due to static and eration economies, proxied by the population density per
dynamic irreversibilities, firms respond to changes in square kilometre. It interesting to note that this new
factor costs by introducing technological innovations regressor does not turn to be significant, and it does not
to increase the effectiveness of the production factor affect the significance of the main variables, that is, the
that is more rigid and has become relatively more growth rate of unit wages and the unemployment rate,
expensive, so as to adapt the marginal rate of technical which keep being negative and positive, respectively.
substitution between factors accordingly. Specifically, In column (3) the manufacturing specialization index
when unit wages increase, because of the irreversibility is also added to mitigate the possible bias that the
Localized Technological Change and Efficiency Wages across European Regional Labour Markets 1695

Fig. 3. Time dispersion of α (standard deviation), by region

Table 2. Fixed effect estimation of equation (12)
(1) (2) (3) (4)
Dependent variable log(αt/αt−1) log(αt/αt−1) log(αt/αt−1) log(αt/αt−1)

log(αt−1) −0.796*** −0.789*** −0.762*** −0.764***

(0.042) (0.042) (0.045) (0.045)
log(wt−1/wt−2) −0.081*** −0.075*** −0.064*** −0.064***
(0.021) (0.021) (0.022) (0.022)
log[Ut/(Et + Ut)] 0.007* 0.011** 0.010** 0.012**
(0.005) (0.005) (0.005) (0.005)
log(Dt−1) 0.160* −0.029
(0.087) (0.019)
log(St−1) −0.036** 0.116
(0.018) (0.092)
Constant −0.572*** −1.423*** −0.612*** −1.224
(0.033) (0.466) (0.039) (0.484)
Number of observations 588 588 588 588
R2 0.474 0.478 0.479 0.481
Number of regions 147 147 147 147

Note: All regressions include time dummies. Standard errors are given in parentheses. ***p < 0.01; **p < 0.05; and *p < 0.1.

specialization in mature and capital-intensive activities Finally, column (4) presents the results for the fully
might introduce in the estimates. Even in this case, the specified model. The coefficient for the growth rate of
additional control variable did not change the substance unit wages is confirmed to be negative and statistically
of the results. significant, while that for the unemployment rate
1696 Cristiano Antonelli and Francesco Quatraro
Table 3. Empirical estimations of equation (16) (spatial error model – SEM)
(1) (2) (3) (4)
Dependent variable log(αt/αt−1) log(αt/αt−1) log(αt/αt−1) log(αt/αt−1)

log(αt−1) −0.787*** −0.789*** −0.750*** −0.755***

(−21.67) (−21.80) (−19.47) (−19.61)
log(wt−1/wt−2) −0.095*** −0.092*** −0.079*** −0.078***
(−5.154 (−5.045) (−4.106) (−4.10)
log[Ut/(Et + Ut)] 0.009* 0.011** 0.011** 0.012**
(1.652) (1.926) (2.038) (2.22)
log(Dt−1) 0.183** 0.152*
(2.210) (1.83)
log(St−1) −0.048*** −0.043**
−2.745) (−2.44)
Spatial autocorrelation −0.990 −0.989 −0.990 −0.990
(−1.46) (−1.46) (−1.47) (−1.46)
Number of observations 588 588 588 588
R2 0.587 0.591 0.592 0.594
Number of regions 147 147 147 147

Note: All regressions include time dummies. t-values are given in parentheses. ***p < 0.01; **p < 0.05; and *p < 0.1.

keeps being positive and significant. Once again, the For this reason it was proposed to check for the
coefficients for the control variables are not significant. robustness of the results by implementing two different
All in all, it may be concluded that the results about estimation techniques, that is, the SEM and the SAR
both the inducement mechanisms engendered by the models.
change in relative prices and the key role of unemploy- Table 3 shows the results for the SEM model
ment are quite robust and persistent across different (equation (16)). Column (1) presents the baseline speci-
econometric specifications. The higher the level of fication of the model, including the growth rate of
unemployment, the lower the power of trade unions, wages and patents as well as the unemployment rate.
which make it less problematic for firms to make a Once again, the growth rate of wages shows a negative
more intensive use of capital if wages increase, with a and significant coefficient, which is robust across all the
given technology. On the contrary, in regional contexts four specifications. The same applies to the coefficient of
characterized by low levels of unemployment, trade the unemployment rate, which is positive and significant
unions can introduce a degree of rigidity such that across all the specifications. As expected, the decompo-
firms may be better off only by increasing the effective- sition of the error term to account for spatial dynamics
ness of (the irreversible stock of internal) labour. engendered an increase in the share of variance
It was noted in the previous section that the analysis explained by the model.
of such phenomena at the regional levels may be sig- Fairly similar evidence is provided by Table 4,
nificantly affected by the spatial structure of the data. where the results of the SAR estimations (equation

Table 4. Empirical estimations of equation (15) (spatial autoregressive model – SAM)

(1) (2) (3) (4)
Dependent variable log(αt/αt−1) log(αt/αt−1) log(αt/αt−1) log(αt/αt−1)

log(αt−1) −0.770*** −0.771*** −0.742*** −0.747***

(−20.57) (−20.68) (−19.00) (−19.14)
log(wt−1/wt−2) −0.074*** −0.071*** −0.064*** −0.063***
(−3.75) (−3.61) (−3.19) (−3.14)
log[Ut/(Et + Ut)] 0.008 0.009* 0.010* 0.011**
(1.36) (1.60) (1.73) (1.90)
log(Dt−1) 0.191** 0.165**
(2.31) (1.98)
log(St−1) −0.042** −0.036**
(−2.35) (−2.03)
H*dependent variable −0.870*** −0.901*** −0.681** −0.725**
(−2.70 (−2.82) (−2.13) (−2.68)
Number of observations 588 588 588 588
R2 0.593 0.597 0.596 −2.27
Number of regions 147 147 147 147

Note: All regressions include time dummies. t-values are given in parentheses. ***p < 0.01; **p < 0.05; and *p < 0.1.
Localized Technological Change and Efficiency Wages across European Regional Labour Markets 1697
(15)) are reported. The negative and significant general efficiency of the production process, due both
effects of wage growth rates are persistent across all to organizational improvements and to the renewal of
the specifications. The unemployment rate keeps the product portfolio. For this reason the paper now
showing a positive and significant effect on the turns to investigate the relationships between the intro-
growth rate of capital output elasticity in all the spe- duction of LTC and the dynamics of productivity
cifications but that presented in column (1). On the growth. Table 5 presents the results of the fixed esti-
whole, the unemployment rate seems to be the vari- mation of equation (13).
able that was most affected by the inclusion of the The MFP growth rate is regressed against the lagged
spatially lagged dependent variable in the structural value of the MFP level as well as the lagged value of
form. Interestingly, the spatial lag of the dependent capital output elasticity (in column (1) of Table 5). As
variable shows a negative and highly significant coef- expected, the lagged dependent variable shows a posi-
ficient across all the different specifications. This evi- tive and significant coefficient. This suggests that a β-
dence opens up interesting avenues for further convergence process features sampled regions (even
research, which goes, however, beyond the scope though it is not a sufficient condition for this con-
of the present paper. It would suggest indeed that clusion). The output elasticity of capital also yields a
the explicit account for spatial dynamics of capital negative effect on productivity. This means that an
output elasticities can absorb the impact of unem- increase in the effectiveness of labour, which follows
ployment rates. In other words, one could think the increase in its relative price, is likely to yield
about the effects of labour mobility across neighbour general efficiency gains in the production process. The
regions and maintain that the introduction of LTC in dynamics of multifactor productivity are therefore
a specific area is affected by the relative rather than shaped by the introduction of LTC. This result is persist-
by the absolute conditions of local labour markets. ent even when the level of innovation efforts are intro-
So far, the empirical results have provided support to duced in the model, such as in column (2). The sign of
the hypotheses that changes in wages are likely to affect the coefficient on α is indeed negative and significant
the dynamics of capital output elasticities, that is, they again, while TC (the proxy for the intensity of techno-
engender the introduction of LTC. This is all the more logical efforts based on patents) shows a positive and sig-
important when the unemployment rates increase. The nificant coefficient. This result allows it to be concluded
investigation of spatial dependence called for a more that systematic innovation efforts biased towards higher
articulated view upon the role of unemployment and levels of labour intensity have a positive effect on the
of the rate of technological change, taking into account growth of MFP.
the interactive dynamics with neighbour regions. In column (3) the labour unit cost is substituted for
However, it has also been argued here that the intro- capital output elasticity as a regressor. Following the pre-
duction of LTC engendered by the dynamics of effi- vious estimations, it should be expected that the
ciency wages in contexts characterized by the rigidity dynamics of wages are positively related to productivity
of factors is also likely to exert strong positive effects via the mechanisms of LTC. The results are definitely
on the productivity growth. Efficiency wages indeed coherent with the proposed framework, supporting
are likely to enhance the commitment of employment, the idea that the dynamics of factor costs are likely to
creating the conditions for augmented learning-by- affect productivity dynamics through the introduction
doing mechanisms and setting in motion a process of of LTC.4 These results can be considered to be an
deeper knowledge accumulation which benefits the important test of the positive effects of the mechanisms

Table 5. Fixed effects estimation of equation (13)

(1) (2) (3) (4)
Dependent variable log(MFPt/MFPt−1) log(MFPt/MFPt−1) log(MFPt/MFPt−1) log(MFPt/MFPt−1)

log(MFPt−1) −0.575*** −0.598*** −0.648*** −0.640***

(0.055) (0.0537) (0.055) (0.055)
log(αt−1) −0.310** −0.249*
(0.160) (0.156)
log(TCt−1) 0.041*** 0.028***
(0.009) (0.010)
log(Wt−1) 0.214*** 0.155***
(0.045) (0.049)
Constant 1.315*** 1.590*** 1.042*** 1.324***
(0.153) (0.161) (0.158) (0.187)
Number of observations 372 372 372 372
R2 0.287 0.333 0.333 0.351
Number of regions 93 93 93 93

Notes: All regressions include time dummies. Standard errors are given in parentheses. ***p < 0.01; **p < 0.05; and *p < 0.1.
1698 Cristiano Antonelli and Francesco Quatraro
Table 6. Empirical estimations of equation (18) (spatial error model – SEM)
(1) (2) (3) (4)
Dependent variable log(MFPt/MFPt−1) log(MFPt/MFPt−1) log(MFPt/MFPt−1) log(MFPt/MFPt−1)

log(MFPt−1) −0.425*** −0.469*** −0.481*** −0.532***

(−9.483) (−10.33) (−10.26) (−11.20)
log(αt−1) −0.226* −0.212*
(−1.70) (−1.63)
log(TCt−1) 0.027*** 0.028***
(3.86) (4.10)
log(Wt−1) 0.144*** 0.149***
(3.75) (3.97)
Spatial autocorrelation −0.98 −0.99 −0.99 −0.98
(0.14) (−1.46) (−1.46) (−1.46)
Number of observations 372 372 372 372
R2 0.492 0.512 0.507 0.529
Number of regions 93 93 93 93

Note: All regressions include time dummies. t-values are given in parentheses. ***p < 0.01; **p < 0.05; and *p < 0.1.

Table 7. Empirical estimations of equation (17) (spatial autoregressive model – SAR)

(1) (2) (3) (4)
Dependent variable log(MFPt/MFPt−1) log(MFPt/MFPt−1) log(MFPt/MFPt−1) log(MFPt/MFPt−1)

log(MFPt−1) −0.422*** −0.467*** −0.479*** −0.531***

(−9.25) (−10.05) (−9.93) (−10.77)
log(αt−1) −0.23* −0.216*
(−1.74) (−1.67)
log(TCt−1) 0.027*** 0.029***
(3.92) (4.17)
log(wt−1) 0.146*** 0.151***
(3.80) (4.02)
H*dependent variable −1.00** −1.00** −1.00** −1.00**
(−2.35) (−2.40) (−2.43) (−2.50)
Number of observations 372 372 372 372
R2 0.509 0.528 0.524 0.545
Number of regions 93 93 93 93

Note: All regressions include time dummies. t-values are given in parentheses. ***p < 0.01; **p < 0.05; and *p < 0.1.

engendered by efficiency wages upon the efficiency of relative factor prices is likely to affect the growth of
the production process. Such a result is also persistent multi-factor productivity significantly.
to the inclusion of innovation efforts (TC) in the
picture (column (4)), which in turn shows a positive
and significant coefficient.
However, the issue of spatial dependence is particu-
larly relevant when the dynamics of regional pro- Internal labour markets and industrial relations reflect
ductivity growth are at stake. For this reason the the conditions of local factor markets and specifically
estimations of the SEM and SAR models are presented the levels of regional unemployment. In regions with
in Tables 6 and 7. The results are quite in line with those low levels of unemployment, trade unions have a
shown in Table 5. much stronger bargaining power with clear effects in
The coefficient on the output elasticity of capital is terms of both the increase of wages and the substantial
negative and significant, suggesting that the decrease in rigidity of employed labour that affect the rate and
the relative efficiency of capital, and hence an increase direction of technological change. Both induce LTC
in the relative efficiency of labour, engenders an increase directed towards the more intensive use of labour
in the general efficiency of the production process. inputs that are becoming more expensive and yet
Moreover, the substitution of the wage rate for capital cannot be dismissed.
output elasticity also yields the expected results, When local labour markets are characterized by rela-
providing further support to the hypotheses that the tive scarcity, hence high wages and low levels of unem-
introduction of LTC stemming from the dynamic of ployment, and internal labour markets are characterized
Localized Technological Change and Efficiency Wages across European Regional Labour Markets 1699
by strong bargaining power of trade unions, firms cannot considered has been strongly biased and uneven. Tech-
fire their workers and substitute capital to labour when nological change was neutral only in a large minority of
wages increase. The rigidity of labour adds to the rigidity cases. The introduction of new technologies has affected
of capital, hence firms are localized in a tiny technical the output elasticity of production factors. This is the first
region by the quasi irreversibility of both production and most important result of the analysis carried out in
factors. This marks a clear difference with respect to the this paper: for quite a long time standard economics in
traditional induced technological change, where changes fact assumed the neutrality of technological change.
in relative prices engender the adoption of new technol- The econometric evidence confirms that the loca-
ogies aimed at saving the use of the production factor lized inducement mechanism in Europe has pushed
that has become more expensive. Here the stickiness of firms facing a substantial increase in wage levels to intro-
production factors do not allow firms to modify the duce new localized technologies directed towards the
amount of labour employed in the production process. more intensive usage of labour. The working of regional
Changes in wages therefore push them to look for techno- labour markets exerts a strong and significant effect on
logical solutions enhancing the output elasticity of labour. the direction and intensity of the localized introduction
The ultimate result, given the rigidity of factors markets, is of new technologies in response to the increase of unit
an increase of the output produced. wages. The analysis of total factor productivity enables
At the same time firms are localized in a limited one to grasp the strong and positive effects of the loca-
portion of the space of techniques by their limited lized introduction of biased and directed technologies
knowledge and competence based upon learning pro- on the general efficiency of the production process.
cesses that root their technological knowledge in a tech- The understanding of the economic complexity of
nical region that is close to their current factor intensity. technological change enables one to grasp the dynamics
Hence they cannot move along existing isoquants when of the iterative interplay between the determinants and
the relative prices of inputs change. They prefer to try to the effects of LTC. A double loop in fact is likely to take
innovate so as to introduce a new and superior technol- place. High levels of employment are at the origin of
ogy that makes it possible to reconcile the marginal pro- increasing unit wages. Firms, however, can substitute
ductivity of labour with the increased wages and is as capital to labour only in regions with high levels of
close as possible to the existing one so as to reduce the unemployment. In regions with high levels of employ-
amount of switching. This leads to the introduction of ment, instead firms can cope with the increase of unit
new localized and biased technologies that are directed wages and only the localized introduction of new tech-
towards the more intensive use of the existing pro- nologies that make a more effective use of the existing
duction factors that are becoming more expensive. In labour inputs. The successful introduction of such new
opposition, when unemployment levels are high and technologies is likely to reduce further the levels of
the bargaining power of trade unions is lower, the unemployment in regional labour markets and hence
increase of wages is more likely to induce the introduc- to push towards the additional increase of unit wages.
tion of labour-saving technological changes, as in the A self-reinforcing process is clearly at work with impor-
induced technological change tradition. tant dynamics effects that confirm that innovation is an
The argument can be considered a direct application of emerging property of a typical system dynamics.
the efficiency wages hypothesis. Strong labour unions are
not only able to obtain an increase in wages and to rule Acknowledgments – The authors acknowledge the
out the substitution of capital to labour, but also to funding from the European Union Directorate for Research,
increase the commitment and dedication of the labour under Grant Number 266959, to the research project entitled
force in the valorization of internal competence based ‘Policy Incentives for the Creation of Knowledge: Methods
upon learning by doing. Firms pushed to pay wages in and Evidence’ (PICK-ME), within the context Cooperation
excess of short-term productivity levels to their irreversible Program/Theme 8/Socio-economic Sciences and Huma-
levels of incumbent employment are induced to rely upon nities (SSH) and of the Collegio Carlo Alberto with the
the enhanced generation of technological knowledge that project IPER and the support of the GREDEG, University
of Nice. The authors wish to thank Stefano Breschi as well
relies upon qualified learning processes so as to try to
as two anonymous referees for their useful comments.
match the twin constraint of their labour force with the Authorship is alphabetical and for the purposes of assessment
introduction of new labour-intensive technologies that of responsibility each author contributes equally to the paper.
enable them to increase their productivity. The reliance
upon internal learning processes sustained by efficiency
wages leads to an increase of MFP levels. Such a process NOTES
is the result of an out-of-equilibrium context of action
where the search for new technologies is induced by 1. It is acknowledged that the use of administrative regions to
out-of-equilibrium conditions and engenders further investigate represents only an approximation of the local
out-of-equilibrium conditions. dynamics underpinning economic activities. Indeed,
The evidence gathered confirms that technological administrative borders are arbitrary, and therefore might
change across the European regions in the period not be representative of the spontaneous emergence of
1700 Cristiano Antonelli and Francesco Quatraro
local interactions. It would be much better to investigate 2. See
these dynamics by focusing on local systems of innovation. 3. For the sake of completeness, the descriptive analysis pro-
However, it is impossible to find out data at such a level of vided in this section also includes the evidence for the UK,
aggregation. Moreover, the identification of local systems though such data are then not used in the econometric test
involves the choice of indicators and threshold values discussed in the fourth section.
according to which it can be decided whether or not to 4. When including in the same regression the unit labour cost
unbundle local institutions. This choice is in turn arbitrary, and innovation levels, the latter variable is likely to explain
and therefore it would not solve the problem, but it would fully the variance in the dependent variable. In the present
only reproduce the issue at a different level. Thus, despite framework innovation levels are indeed strongly related,
the unavoidable approximation, this analysis may provide and wages have an effect on productivity only through
useful information on the dynamics under scrutiny. localized innovation efforts.

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