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Sources of Productivity Slowdown in European Countries During 1990s

  • Enrico Saltari
  • Giuseppe Travaglini

In this paper we address the question whether the shift in labour supply curve is the only fundamental change capturing the negative correlation between the growth rates of productivity and employment in European countries in the last fifteen years. If this explanation is correct then the labour demand curve did not shift in recent times, keeping other features of the production function unchanged. This is obviously a problem of identification. Thus, in this study we provide some empirical evidence explaining the shifts in labour demand curve over the same period. Our main conclusion is that the sluggish performance of the European economy in the last fifteen years has a common root in the large changes occurred in the labour market. We refer to these changes as technological and non technological shocks. In our model, adverse technological shocks shift the labour demand curve, while positive non technological shocks shift the labour supply curve. These two shifts contribute simultaneously to rise employment and to decrease the growth rate of productivity. Our evidence shows that labour productivity does respond positively to labour demand (technological) shocks and negatively to labour supply (non technological) shocks. Hence, the main result of our study is that both shocks are necessary to provide a complete picture of the employment-productivity trade-off in European countries during the last fifteen years.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 07/24.

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Date of creation: Aug 2007
Date of revision:
Handle: RePEc:yor:yorken:07/24
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  1. Jordi Galí & David López-Salido & Javier Vallés, 2000. "Technology Shocks and Monetary policy: Assessing the Fed's Performance," Banco de Espa�a Working Papers 0013, Banco de Espa�a.
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  11. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier.
  12. Neville Francis & Valerie A. Ramey, 2006. "The Source of Historical Economic Fluctuations: An Analysis Using Long-Run Restrictions," NBER Chapters, in: NBER International Seminar on Macroeconomics 2004, pages 17-73 National Bureau of Economic Research, Inc.
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