Population instability and EU-production function anomaly

Abstract

The purpose of the study is to present the problematic situation when capturing the economic growth mechanism in the European Union. Due to intra-EU migration, the prominent production function framework fails to deliver consistent results. Estimation of structural parameters on data covering the post-accession period up to 2016 delivered a negative (!) assessment of the contribution of “labour” to output for most of the new member states. This result called for further investigations, and a holistic interpretation. It seems that this is the first time a methodological study on the production function framework offers an explicit formulation of the requirements for this method to be effectively employed in output investigations. In short, the production function can be used for cases where the growth mode is extensive, while arguments display declining or ascending trends. However, when the growth mode is intensive, while any of the arguments decline in value, this particular framework will become invalid for capturing the growth mechanism. The observed failure of the production function calls for introducing a new term to the economic growth literature: EU-production-function-anomaly. The method seems to be a far-reaching simplification. The reason for utilizing a very general formulation (excluding human capital and technology) is motivated by the focus on the demographic developments responsible for the anomaly.