Using the Spatial Econometric Approach to Analyze Convergence of Labor Productivity at the Provincial Level in Vietnam

Abstract:This paper employs the spatial econometric approach to undertake a research of labor productivity convergence of the industrial sector among sixty provinces in Vietnam in the period 1998-2011. It is shown that the assumption of the independence among spatial units (provinces in this case) is unrealistic, being in contrast to the evidence of the data reflecting the spatial interaction and the existence of spatial lag and errors. Therefore, neglecting the spatial nature of data can lead to a misspecification of the model. We decompose the sample data into the sub-periods 1998-2002 and 2003-2011 for the analysis. Different tests point out that the spatial lag model is appropriate for the whole period of the sample data (1998-2011) and the sub-period (2003-2011), therefore, we employ the maximum likelihood procedure to estimate the spatial lag model. The estimation results allow us to recognize that the convergence model without a spatial lag variable and using ordinary least square to estimate has the problem of omitting variables, which will have impact on the estimated measure of convergence speed. And this problem dominates the positive effect of factors such as mobilizing factors, trade relation, and knowledge spillover in the regional scope.