Abstract
The authors present empirical evidence on the determinants of industry-level multifactor productivity growth. They focus ontraditional factors,including the process of technological catch up, human capital, and research and development (R&D), as well as institutional factors affecting labor adjustment costs. Their analysis is based on harmonized data for 17 manufacturing industries in 18 industrial economies over the past two decades. The disaggregated analysis reveals that the process of technological convergence takes place mainly in low-tech industries, while in high-tech industries, country leaders tend to pull ahead of the others. The link between R&D activity and productivity also depends on technological characteristics of the industries: while there is no evidence of R&D boosting productivity in low-tech industries, the effect is strong in high-tech industries, but the technology leaders tend to enjoy higher returns on R&D expenditure compared with followers. There is also evidence in the data that high labor adjustment costs (proxied by the strictness of employment protection legislation) can have a strong negative impact on productivity. In particular, when institutional settings do not allow wages or internal training to offset high hiring and firing costs, the latter reduce incentives for innovation and adoption of new technologies, and lead to lower productivity performance. Albeit drawn from the experience of industrial countries, this result may have relevant implications for many developing economies characterized by low relative wage flexibility and high labor adjustment costs.
Highlights
Recent growth trends in OECD economies have renewed interest by policy makers and analysts on the sources of economic growth
We present an empirical investigation of the drivers of industry-level multifactor productivity growth for a set of manufacturing industries in 18 OECD economies
We focus on traditional growth factors, including technological catch up, human capital and R&D as well as institutional factors affecting labor costs
Summary
Recent growth trends in OECD economies have renewed interest by policy makers and analysts on the sources of economic growth. Three main aspects of labor market policy and institutional settings seem to be more closely related to the incentive for firms to expand and innovate, the links are often complex: i) the system of industrial relations; ii) the costs of hiring and firing (proxied by the stringency of Employment Protection Legislation, EPL); and iii) the possible interactions between industry-specific characteristics of the technology and EPL, which lead to different human resource strategies. The summary indicator of the bargaining system combines two aspects: i) the level of bargaining: centralized, intermediate (at sector or regional), or decentralised (firm level); and ii) the degree of co-ordination among, on the one hand, employers’ associations and, on the other, trade unions This combined variable allows consideration of cases where co-operation between employers and unions in an industry bargaining setting (e.g., Germany and Austria and, more recently, Italy, Ireland and the Netherlands with the income policy agreements) may be an alternative, or functionally equivalent, to centralized systems, thereby mimicking their outcomes. High mark ups could be taken as a sign of market power in industries with low R&D, they may well be an indication of innovation rents in those with high R&D (Oliveira Martins and Scarpetta, 1999)
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