Convergence of Income Among Provinces in Canada – An Application of GMM Estimation

This paper tests for unconditional and conditional income convergence among provinces in Canada during the period 1981-2001. We apply the first-differenced GMM estimation technique to the dynamic Solow growth model and compare the results with the other panel data approaches such as fixed and random effects. The method used in this paper accounts for not only province-specific initial technology levels but also for the heterogeneity of the technological progress rate between the ‘richer’ and ‘not so richer’ provinces of Canada. One of the findings of the paper is that the Canadian provinces do not share a common technology progress rate and a homogeneous production function. The findings of the study suggest a convergence rate of around 6% to 6.5% p.a. whereas the previous studies using OLS and other techniques reported a convergence rate of around 1.05 % for per capita GDP and 2.89% p.a. for personal disposable income among Canadian provinces.