Structural change, labour productivity and the Kaldor-Verdoorn law: evidence from European countries

Over the last two decades mature European countries experienced a slackening in economic growth and stagnating labour productivity. Such stagnating productivity may result both from poor ‘within sector’ growth and/or ‘structural change’. The contribution of the paper with regard to these issues is twofold. First, we assess the weight of ‘structural change’ versus ‘within sector’ growth in affecting overall productivity dynamics by means of a shift-share analysis. Second, we empirically investigate the impact of demand factors on ‘within sector’ productivity growth: to do so, we estimate Kaldor-Verdoorn long-run coefficients in response to the dynamics of autonomous demand by implementing an ARDL cointegration-based methodology. With regard to major European countries for the 1980-2015 timespan, we find that: (i) productivity growth is mainly driven by the ‘within sector effect’, with a relatively smaller role played by structural change, particularly after 1999; (ii) autonomous demand growth is relevant in determining productivity dynamics, especially in manufacturing. A major policy implication to deal with structural change issues is that coordinated expansionary macroeconomic policies would matter for productivity growth in the EU, and at the same time contribute to sustain employment.