Income convergence within an economic union: The role of factor mobility and coordination

Abstract

In the context of a human-capital-based growth model, we show the essential role of labor mobility in equalizing income levels for countries that start off from different initial income positions. Human capital externalities cum labor mobility are the driving forces behind the income level equalization process. In a non-cooperative equilibrium, labor mobility will be limited and income level equality will not be achieved. Coordination will allow free mobility of labor within an economic union, leading to income convergence. Coordination of educational policies will also help internalize the inter-regional human capital externalities to ensure efficient growth for members of the union.