Structural change, institutions and the dynamics of labor productivity in Europe
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Structural change, institutions and the dynamics of labor productivity in Europe Riccardo Pariboni 1,2 & Pasquale Tridico 2 # The Author(s) 2019
Abstract The objective of this paper is to explain the reasons behind the dynamics of labor productivity (LP) growth during a process of institutional and structural change. We show - by means of a theoretical discussion and an empirical analysis, conducted on a sample of 25 European countries for the period 1995–2016 - that four main channels contribute to explaining the evolution of LP. First, the speed of investment, which incorporates innovation and favors an increase of LP growth; second, the speed of Research and Development (R&D), which allows for the creation of new ideas and shows the “dynamism of a society”, having positive effects on LP; third, the deregulation of labor markets and the increase of temporary employment, both of which encourage labor-intensive strategies by firms, with low value-added and low productivity gains; fourth, the direction of structural change, which can take place toward services industries affected by “Baumol’s disease”. Keywords Labor productivity . R&D . Institutions . Labor flexibility JEL classification L16 . E24 . H53
1 Introduction In recent years, several developed countries have experienced a productivity slowdown, which has taken place in the middle of a process of institutional and structural change.
* Riccardo Pariboni [email protected] Pasquale Tridico [email protected]
1
Max Planck Institute for the Study of Societies (MPIFG), Cologne, Germany
2
Roma Tre University, Dipartimento di Economia, via Silvio D’Amico 77, 00145 Rome, Italy
R. Pariboni, P. Tridico
As shown in Fig. 1, a common trend seems to emerge. Independently of the socioeconomic welfare model,1 labor productivity growth in the European countries2 in the four panels has displayed a decreasing or stagnating pattern.3 The main purpose of this article is to provide a theoretical and empirical analysis of the impact of some major socio-economic phenomena on the dynamics of labor productivity. We aim to show both theoretically and by means of an econometric model applied to EU countries that four main channels contribute to explaining the evolution of our variable of interest. First would be the speed of investment (measured by the rate of investment growth), which incorporates innovation and favors an expansion of aggregate demand and an increase of LP (in the sense of Kaldor and Schumpeter). We will discuss the role of institutions4 in fostering innovation; in this sense we build a bridge between Schumpeterian and Kaldorian insights. More specifically, Kaldor’s ideas – and in particular his technical progress function – are recalled, to stress the importance of investment in physical assets as a vector of technological advancement. However, the productivity stagnation commenced, in different countries, a few years earlier than the slowdown in capital accumulation. Hence, the latter cannot be the causa causans of the fo
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