Does Public Policy Matter for Labor Productivity Growth?: A Political-Economic Analysis of Productivity Effects of Policy in OECD Countries

Abstract

Labor productivity - output per hour worked - is an important factor determining the wealth of national economies and their standards of living. Its growth accounts for about half of per capita GDP growth in OECD countries. Despite its importance, it has received scant attention in political science. This paper seeks to fill a gap in the study of the productivity effects of government policy. I provide an explanation from the perspective of human capital investments, where governments can help promote human capital investments by individuals (1) by reducing the costs of investments and thereby increasing their net benefits by using public education, redistribution, welfare, and labor market policy and (2) by creating a social environment (with policies and institutions) where human capital investments pay and individuals believe it. The main empirical findings are the following. Family support policy boosts productivity growth. So does public education, particularly university education. However, at least when measured by public spending levels, active labor market policy (ALMP) suppresses productivity growth. The nature and quality of ALMP may matter more than spending. Meanwhile, although market poverty and income inequality are found to reduce productivity growth and thus redistribution would be expected to promote it, pro-productivity effects of redistribution are not detected, when it is measured simply as reductions in poverty and inequality after taxes/transfers. Redistribution through the provision of public services such as family support and education may be better for productivity growth. Finally, social democratic governments facilitate productivity growth, over and above the effects of their hallmark policy and institutional variables.