European regional growth: do sectors matter?

The recent theoretical and empirical works on economic growth based on Solow’s model have generally neglected the role played by the sectoral mix and structural change on aggregate growth. However, as many development economists have remarked, sectors are characterized by enormous differences in terms of technological change, inter-sectoral linkages and the degree of scale economies. In this paper we show that indeed sectors matter in determining aggregate growth across European regions. More specifically, we show that large part of convergence is induced by a structural change process of shifting employment from low to high productive sectors that is relatively faster in the initially less productive southern European regions.