Four Worlds of Productivity Growth: A Comparative Analysis of Human Capital Investment Policy and Productivity Growth Outcomes

Abstract

Labor productivity is an important determinant of the wealth of national economies and standards of living, as its growth explains half of per capita GDP growth. We show that there are four worlds of productivity growth among industrialized countries, by decomposing labor productivity growth into multifactor productivity (MFP) growth and capital deepening. The four worlds that emerge from the analysis are: 1) human capital investment and MFP growth-dominant Nordic coordinated market economies (CMEs); 2) physical capital investment- and labor productivity growth-dominant liberal market economies; 3) continental CMEs whose moderately high human capital investments create decently high MFP growth, but whose low physical capital investments push down their labor productivity; and 4) South European countries with both low human capital investment and low productivity growth. The four worlds are a result partly of the countries’ human capital formation policies and economic growth strategies — different policies add differently to the components of labor productivity. Overall, we tie welfare production regimes to economic outcomes by showing that different human capital formation policies produce different economic outcomes.