Industry-level Factor Inputs and TFP and Regional Convergence: 1970-2008

Using the Regional-Level Japan Industrial Productivity (R-JIP) Database, we examined prefectural differences in labor productivity from 1970 to 2008 from various angles by looking at prefectural differences in industrial structure and prefectural and industry differences in factor inputs and productivity. First, in section 2, we decomposed prefectural labor productivity differences into the contribution of differences in industrial structure and the contribution of within-industry differences in labor productivity, and further decomposed the latter into the contribution of capital-labor ratio, labor quality, and total factor productivity (TFP). Next, in section 3, we decomposed prefectural differences in productivity and factor inputs into the share effect due to prefectural differences in industrial structure and the within effect due to prefectural differences in productivity or factor intensity within the same industry. Finally, in section 4, we examined which industries make the largest contribution to prefectural differences in productivity and how they do so—namely, through differences in capital-labor ratio, labor quality, or TFP, and through the share effect or the within effect. The results of these analyses show that industrial structures among prefectures became increasingly similar over the roughly four decades, and that this greatly contributed to the decline in labor productivity differences overall. In contrast, within-industry differences in labor productivity among prefectures declined only marginally over the same period and therefore hardly contributed to the reduction in prefectural labor productivity differences. The decomposition of within-industry labor productivity differences shows that although such within-industry differences show relatively little change over time, the factors contributing to them did shift considerably. That is, while regional differences in capital-labor ratios decreased substantially, regional within-industry differences in TFP increased. Therefore, the increase in within-industry differences in TFP is the main cause of the recent slowdown of the convergence of regional labor productivity differences. By decomposing the covariance between within-industry TFP differences and labor productivity differences among prefectures into each industry's contribution, we find vital contribution of service industries, especially wholesale and retail trade, and other non-government services, suggesting the important role of these service industries in recent increase of within-industry differences in TFP, and thereby in the recent slowdown of the convergence of regional labor productivity differences.