Regional Productivity and Income Convergence in Canada Under Increasing Economic Integration‪.‬

Regional disparities in such factors as wages and incomes have long been a concern of developed and developing countries. The concern has emanated from both equity and efficiency considerations. Equity issues arise if the gains from being part of a country appear to be unfairly divided, and especially if some parts of the country appear to be permanently falling behind and bypassed by economic progress. Efficiency issues arise because disparities can be a sign that resources are not being allocated efficiently. Sustained differences in wages that reflect differences in productivity, for example, can mean that labour is not being reallocated from where its productivity is low to where it is high. Sustained differences in unemployment rates can mean that labour is not being reallocated from areas where it is under utilized to where it is more fully utilized. (1) Equity and efficiency pertaining to regional inequalities are also interrelated. Lack of social access to the gains of being part of a country can lead to political and social instability that can result in efficiency costs. In such circumstances, resources have to be devoted to restore stability, property rights can become ill-defined, and capital may be reluctant to enter given the investment uncertainty. As well, if transfer payments have to be instituted to ensure a degree of equity, these can blunt the market signals that serve to reallocate resources to their most valued uses. Furthermore, the taxes needed to raise the revenues for the transfers can create distortions that also have efficiency costs. Once taxes and transfers become a significant part of the landscape, real resources get devoted to rent seeking activities to obtain the transfers and avoid the taxes. Clearly, issues of equity and efficiency are inextricably entwined.