Convergence Equations and Income Dynamics: The Sources of OECD Convergence, 1970-95

This paper illustrates how convergence equations can be used to analyse the dynamics of the income distribution, thus overcoming some of the limitations of this methodology noted by Quah. Using panel data for a sample of OECD countries, we estimate a growth equation that relates the growth rate of income per capita to the rates of accumulation of physical, human and technological capital, the share of government expenditures in GDP and the behaviour of the labour market, while allowing for the main convergence mechanisms identified in the literature. The estimated model and the underlying data are then used in a convergence accounting exercise, which yields quantitative estimates of the contribution of each of these variables to the relative growth performance of each country and to observed income convergence in the sample.