Why are some regions so much more productive than others?

Differentials in aggregate labor productivity across regions could be due to differences (1) in workers’ skills (2) in firms’ technologies (3) in how efficiently skills and technologies are matched and (4) in institutional factors specific to the region. I separately identify each determinant using matched employer employee data. I estimate skills by comparing the wages of each worker with co-workers in the same firm and in the same region; technologies by comparing the productivity of firms with same workforce’s skills and in the same region. I estimate positive complementarities between skill and technology, by measuring in a model of the aggregate production function how workers and firms jointly contribute to productivity in the same region. Finally, I disentangle region-specific factors from technologies since some firms have plants in more than one region. In an application to Italian regions, I find that large differentials in productivity are explained by 60% by differences in firms’ technologies and by 35% by differences in the region-specific factors. Instead, differences in the distribution of skills have no impact, since they are close to zero and do not change with the migration of workers. Also, under optimal assignment of workers productivity differences do not increase, but productivity level rises by around 20%.