Evaluating the spatial mismatch between population and factor endowments: The case of the European Union

Considerable research has been conducted on the trade-off between reducing regional inequality and promoting regional growth. However, no empirical research has explored the relationship between this trade-off and the spatial mismatch between the distribution of the regional population and the spatial distribution of regional factor endowments, such as labour and capital. The location of labour and capital is crucial in determining regional economic growth and inequalities. Therefore, we aim to assess the impact of spatial mismatches between factors of production (employment and physical capital stock) and population on regional growth and regional inequality. The study first calculates the Spatial Mismatch Indices for capital stock and employment with respect to the distribution of population across regions. Then, we use a VAR approach to detect the dynamic interactions in the short run among the location of the European regional population with respect to regional labour and physical capital, economic growth, and inequality growth. The research does not find a direct trade-off between regional European economic growth and inequality growth. Instead, the results support the view that the best strategy to mitigate economic inequality is to generate spatial mismatches between the spatial distribution of population and employment and between population and physical capital. When addressing regional disparities, the distribution of employment and physical capital should not be based solely on population criteria. Instead, spatial mismatches should be increased. However, the typical approach to implementing regional policies to allocate resources based on population-related criteria does not reduce economic inequality.