Do Cross-Section Dependence and Parameter Heterogeneity Matter? Evidence on Human Capital and Productivity in Greece

Benos, Nikos and Karagiannis, Stelios (2013): Do Cross-Section Dependence and Parameter Heterogeneity Matter? Evidence on Human Capital and Productivity in Greece.

Abstract

This paper estimates production functions for Greek regions over 1981-2003, using a novel human capital dataset. We construct rich human capital series, where data for employees are decomposed according to their education level. Our empirics include recent non-stationary panel techniques, allowing for cross-section dependence and parameter heterogeneity in production technology, along with fixed effects and dynamic panel estimators. We show that ignoring cross-section dependence and parameter heterogeneity has a serious distorting impact on the estimated results, both qualitatively and quantitatively. Our evidence shows that tertiary education has a strong positive association with labor productivity growth, while secondary education exhibits a negative relationship. Primary education, public capital and net agglomeration do not display any relation with growth. Overall, findings suggest that policy makers should account for spillovers alongside technology heterogeneity and direct their efforts towards the expansion of tertiary education in poor regions in order to promote convergence.

• Item Type: MPRA Paper
• Language: English
• Keywords: Labor productivity, Growth, Human capital, Regional data, Panel data
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; I - Health, Education, and Welfare > I2 - Education and Research Institutions > I21 - Analysis of Education; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J24 - Human Capital ; Skills ; Occupational Choice ; Labor Productivity; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R10 - General

References

Abel, J.R, Dey, I., Gabe, T.M., 2012. Productivity and the Density of Human Capital, Journal of Regional Science, 52, 4, 562-586.

Abel, J.R., Gabe, T.M., 2011. Human Capital and Economic Activity in Urban America, Regional Studies, 45, 8, 1079–1090.

Abramowitz, M., 1956. Resource and output trends in the United States since 1870. American Economic Review 46, 2, 5–23.

Ahking F.W., 2002. Model mis-specification and Johansen’s co-integration analysis: an application to the US money demand. Journal of Macroeconomics, 24, 1, 51–66.

Andersson, F., Burgess, S., Lane, J.I., 2007. Cities, Matching and the Productivity Gains of Agglomeration. Journal of Urban Economics, 61, 112–118.

Arbia, G., Battisti, M., Di Vaio, G., 2010. Institutions and geography: Empirical test of spatial growth models for European regions. Economic Modelling 27, 12–21.

Arellano, M., Bond, S., 1991. Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58, 277-297.

Arellano, M., Bover, O., 1995. Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68, 29-51.

Asteriou, D., Agiomirgianakis, G.M. 2001. Human capital and economic growth: Time series evidence from Greece. Journal of Policy Modeling, 23, 481–489.

Azariadis, C., Drazen, A., 1990. Threshold externalities in economic development. Quarterly Journal of Economics, 105, 501–26.

Baltagi BH, 2008. Econometric analysis of panel data, 4th edition, Wiley, Chichester.

Banerjee, A., Marcellino, M., Osbat, C., 2004. Some Cautions on the Use of Panel Methods for Integrated Series of Macroeconomic Data. Econometrics Journal, 7, 322–340.

Banerjee, A., Marcellino, M., Osbat, C., 2005. Testing for PPP: Should We Use Panel Methods? Empirical Economics, 30, 1, 77–91.

Barro, R.J., Lee, J.W., 2010. A new data set of educational attainment in the world, 1950–2010. NBER Working Paper No. 15902. (Educational Attainment Dataset, Version 1.2)

Barro, R.J., Sala-i-Martin, X., 2004. Economic growth. Cambridge, MA: MIT Press.

Basher S.A, Westerlund, J., 2007. Is there really a unit root in the inflation rate? More evidence from panel data models. Applied Economics Letters 15, 3, 161–164.

Blundell, R., Bond, S., 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87, 115-143.

Bronzini, R., Piselli, P., 2009. Determinants of long-run regional productivity with geographical spillovers: The role of R&D, human capital and public infrastructure. Regional Science and Urban Economics, 39, 187–199.

Brülhart, M., Mathys, N.A., 2008. Sectoral agglomeration economies in a panel of European regions. Regional Science and Urban Economics, 38, 348–362.

Campbell, J.Y., Perron, P., 1991. Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots. NBER Chapters, in: NBER Macroeconomics Annual 1991, 6, National Bureau of Economic Research, Inc., 141–220

Caselli, F., Esquivel, G., Lefort, F, 1996. Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics, Journal of Economic Growth, 1, 3, 363-389.

Castells, A., Solé-Ollé, A. 2005. The regional allocation of infrastructure investment: The role of equity, efficiency and political factors. European Economic Review, 49, 1165-1205.

Catao, L.A.V., Solomou, S.N., 2005. Effective exchange rates and the classical gold standard adjustment. American Economic Review, 95, 1259–1275.

Catao, L.A.V., Terrones, M.E., 2005. Fiscal deficits and inflation. Journal of Monetary Economics, 52, 529–554.

Cheshire, P.C. Malecki, E.J., 2004. Growth, development, and innovation: a look backward and forward. Papers in Regional Science, 83, 249-267.

Christopoulos D., Tsionas E, 2004. Convergence and regional productivity differences: evidence from Greek prefectures. Annals of Regional Science, 38, 387–396.

Chudik, A., Pesaran, M.H., Tosetti, E. 2011. Weak and strong cross-section dependence and estimation of large panels. Econometrics Journal, 14,1, C45-C90.

Ciccone, A., 2002. Agglomeration effects in Europe. European Economic Review 46 (2), 213–227.

Ciccone, A., Hall, R., 1996. Productivity and the density of economic activity. American Economic Review 86, 1, 54–70.

Cohen, J.P., Morrison Paul, C.J., 2009. Agglomeration, Productivity, and Regional Growth: Production Theory Approaches, in: R. Capello and P. Nijkamp (Eds.), Handbook of Regional Growth and Development Theories. Cheltenham: Edward Elgar.

Cuaresma, J.C., Doppelhofer, G. Feldkircher, M., 2012: The Determinants of Economic Growth in European Regions, Regional Studies, DOI:10.1080/00343404.2012.678824 (forthcoming)

Cuaresma, J.C., Feldkircher, M., 2012. Spatial filtering, model uncertainty and the speed of income convergence in Europe, Journal of Applied Econometrics, DOI: 10.1002/jae.2277

Di Liberto, A., 2007. Education and Italian regional development. Economics of Education Review, 27(1), 94–107.

Ding, S., Knight, J., 2011. Why has China Grown So Fast? The Role of Physical and Human Capital Formation Oxford Bulletin of Economics and Statistics, 73, 2, 141-174.

Durlauf, S.N., Kourtellos, A., Minkin, A., 2001. The local Solow growth model. European Economic Review 45(4–6), 928–940.

Durlauf, S., Johnson, P. 1995. Multiple regimes and cross-country growth behaviour. Journal of Applied Econometrics, 10, 365–84.

Eberhardt, M., Teal, F., 2011. Econometrics for Grumblers: A New Look at the Literature on Cross-Country Growth Empirics, Journal of Economic Surveys, 25, 1, 109–155.

Eberhardt, M., Teal, F., 2012a. Productivity analysis in global manufacturing production, mimeo, March, 1-32.

Eberhardt, M., 2012b. Estimating panel time series models with heterogeneous slopes, Stata Journal, 12, 1, 61-71.

Eberhardt, M., Bond, S., 2009. Cross-section dependence in nonstationary panel models: A novel estimator. MPRA Paper 17870, University Library of Munich.

Granger, C.W.J., 1988. Aggregation of time series variables: a survey. Federal Reserve Bank of Minneapolis Discussion Paper/Institute for Empirical Macroeconomics #1.

Granger, C.W.J., Siklos, P.L., 1995. Systematic sampling, temporal aggregation, seasonal adjustment, and cointegration theory and evidence. Journal of Econometrics 66, 1–2, 357–369.

Griliches, Z., 1997. Education, Human capital and growth: a personal perspective, Journal of Labor Economics, 5, 1, 330–344.

Hamming, R.W. 1973. Numerical methods for scientists and engineers. New York: McGraw-Hill, 349-356.

Henderson, V.J., 1997. Externalities and industrial development. Journal of Urban Economics, 42, 3, 449-470.

Jaunky, V.C., 2012. Democracy and economic growth in Sub-Saharan Africa: a panel data approach, Empirical Economics, DOI 10.1007/s00181-012-0633-x

Johansson, E. 2003. Intergovernmental grants as a tactical instrument: empirical evidence from Swedish municipalities. Journal of Public Economics 87, 5-6, 883-915.

Kapetanios, G., Pesaran, M.H., Yamagata, T., 2011. Panels with non-stationary multifactor error structures," Journal of Econometrics, 160, 2, 326-348.

Karnik, A Lalvani, M., 2012. Growth performance of Indian states, Empirical Economics, 42(1), 235-259.

Kosfeld, R., Lauridsen, J., 2004. Dynamic spatial modelling of regional convergence processes. Empirical Economics, 29, 705-722.

Krueger, A.B., Lindahl, M. 2001. Education for growth: why and for whom? Journal of Economic Literature, 39(4), 1101-1136.

Lambrinidis, M., Psycharris, Y., Rovolis, A., 2005. Regional allocation of public infrastructure investment: the case of Greece. Regional Studies, 39(9), 1231-1244.

Lee, K., Pesaran, M. H., Smith, R., 1998. Growth empirics: a panel data approach – a comment. Quarterly Journal of Economics, 113(1), 319-323.

Lee, K., Pesaran, M.H., Smith, R., 1997. Growth and convergence in a multi-country empirical stochastic Solow model. Journal of Applied Econometrics 12, 4, 357-392.

Loayza, N., Ranciere, R., 2006. Financial development, financial fragility, and growth. Journal of Money, Credit and Banking, 38, 1051-1076.

Louri, H., 1989. Regional policy and investment behaviour: the case of Greece, 1971–1982. Regional Studies, 23(3), 231-239.

Lucas, R.E., 1988. On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3-42.

Maddala, G., Wu, S., 1999. A comparative study of unit root tests and a new simple test. Oxford Bulletin of Economics and Statistics, 61, 631-652.

Magoula, T., Psacharopoulos, G., 1999. Schooling and monetary rewards in Greece: an over-education false alarm. Applied Economics, 31, 1589-97.

Mankiw, N., Romer, D., Weil, D. 1992. A contribution to the empirics of economic growth. Quarterly Journal of Economics, 107, 2, 407-37.

Martins, P.M.G., 2011. Aid absorption and spending in Africa: a panel cointegration approach. The Journal of Development Studies, 47, 12, 1925-1953.

McDonald, J., McMillen, D. 2007. Urban Economics and Real Estate: Theory and Policy. Blackwell Press.

Michelis, L., Papadopoulos, A.P, Papanikos, G.T. 2004. Regional Convergence in Greece in the 1980s: An Econometric Investigation. Applied Economics 36, 881-888.

Mitrakos, T., Tsakloglou, P., Holezas, I. 2010. Wage determinants in Greece with emphasis on tertiary education graduates. Bank of Greece Economic Bulletin, No.34 (in Greek).

Munnell, A. H., 1992. Infrastructure investment and economic Growth. Journal of Economic Perspectives, 6, 189-198.

Nelson, R.R., Phelps, S.E., 1966. Investment in humans, technological diffusion, and economic growth. American Economic Review, 56(1-2), 69-75.

Nelson, C.R., Plosser, C., 1982. Trends and random walks in macroeconomic time series: some evidence and implications. Journal of Monetary Economics 10, 2, 139-162.

OECD, 2004. OECD Employment Outlook - Chapter 2 Employment Protection Regulation and Labour Market Performance, OECD Publishing.

OECD, 2011. Education Policy Advice for Greece, Strong Performers and Successful Reformers in Education, OECD Publishing. (http://dx.doi.org/10.1787/9789264119581-en; last access June 20,2013)

OECD, 2010. PISA 2009 at a Glance, OECD Publishing. (http://dx.doi.org/10.1787/9789264095298-en; last access September 3, 2013)

Ohmae, K., 1995. The end of the nation state. Free Press, New York.

Papageorgiou, C., 2003. Distinguishing between the effects of primary and post-primary education on economic growth. Review of Development Economics, 7(4), 622–635.

Pablo-Romero, M. del P., Gómez-Calero, M. de la P., 2013. A translog production function for the Spanish provinces: Impact of the human and physical capital in economic growth. Economic Modelling, 32, 77–87.

Pedroni, P.,2007. Social capital, barriers to production and capital shares: implications for the importance of parameter heterogeneity from a nonstationary panel approach. Journal of Applied Econometrics, 22, 2, 429-451.

Pereira, J., Aubyn, M. St., 2009. What level of education matters most for growth? Evidence from Portugal. Economics of Education Review, 28(1), 67–73.

Pesaran, M.H., Smith, R.J. (1995). Estimating long-run relationships from dynamic heterogeneous panels. Journal of Econometrics, 68, 79-113.

Pesaran, M.H., 2004. General Diagnostic Tests for Cross Section Dependence in Panels, Working Paper 435, University of Cambridge, Cambridge.

Pesaran, M., 2007. A Simple Panel Unit Root Test in the Presence of Cross Section Dependence. Journal of Applied Econometrics, 22, 265-312.

Petrakis, P.E., Stamatakis, D., 2002. Growth and educational levels: A comparative analysis. Economics of Education Review, 21(5), 513-521.

Phillips, P.C.B., Sul, D., 2003 Dynamic panel estimation and homogeneity testing under cross section dependence. Econometrics Journal, 6, 1, 217-259.

Piras, G., Postiglione, P., Aroca, P., 2012. Specialization, R&D and productivity growth: evidence from EU regions. Annals of Regional Science, 49, 1, 35-51.

Press, W.H., Teukolsky, S.A, Vetterling, W.T., Flannery, B.P. 2007. Numerical recipes: the art of scientific computing. Cambridge: Cambridge University Press. 120-124.

Pritchett, L., 2001. Where has all the education gone? World Bank Economic Review, 15, 3, 367-91.

Ramos, R., Suriñach, J., Artís, M., 2010. Human capital spillovers, productivity and regional convergence in Spain. Papers in Regional Science, 89, 2, 435-447.

Rodríguez-Pose, A., Psycharis, Y., Tselios, Y., Public investment and regional growth and convergence: evidence from Greece, CEPR DP 9011, 6/12.

Romer, P.M., 1990. Endogenous technological change. Journal of Political Economy, 98, 5, 71-102.

Roos, 2005, M.W.M. How important is geography for agglomeration? Journal of Economic Geography, 5, 605–620.

Rovolis, A., Spence, N., 2002. Promoting Regional Economic Growth in Greece by Investing in the Public Infrastructure” Environment and Planning C: Government and Policy, 20, 3, 393-419.

Sari, R., Soytas, U., 2006. Income and education in Turkey: A multivariate analysis. Education Economics, 14, 2, 181-196.

Soukiazis, E., Antunes, M., 2011. Is foreign trade important for regional growth? Empirical evidence from Portugal. Economic Modelling, 28, 1363–1373.

Stata Reference Manual, Release 11, volume D, 2009, Stata Press, College Station, Texas.

Storper, M. 1997. The regional world: territorial development in a global economy. Guilford Press, New York.

Temple, J., 1999a. A positive effect of human capital on growth. Economics Letters, 65, 1, 131-134.

Temple, J., 1999b. The new growth evidence. Journal of Economic Literature, 37(1), 112–156.

United Nations 2000, General Assembly, 18 September (A/RES/55/2), Fifty-fifth session, Agenda item 60 (b), 00 55951, Resolution adopted by the General Assembly [without reference to a Main Committee (A/55/L.2)], 55/2. United Nations Millennium Declaration.

Vandenbussche, J., Aghion, P., Meghir, C., 2006. Growth, distance to frontier and composition of human capital. Journal of Economic Growth, 11, 2, 97-127.

Yamano, N., Ohkawara, T., 2000. The regional allocation of public investment: efficiency or equity? Journal of Regional Science, 40, 2, 205-229.