Productivity Growth and Economic Performance: Essays on Verdoorn’s Law

Abstract

The term Verdoorn’s Law refers to the statistical relation between the growth of manufacturing output and the growth of labour productivity in manufacturing, where causality runs from the former to the latter. This relationship is named after the Dutch economist P.J. Verdoorn, who was among the first to find such empirical regularity in a cross section of industries (Verdoorn, 1949). Verdoorn’s work did not achieve immediate attention in the economics profession. It was quoted by Arrow in his classic 1962 paper on ‘learning by doing’ (Arrow, 1962), but has not received widespread recognition until 1966, when Nicholas Kaldor explicitly referred to it and coined the term Verdoorn’s Law in his Cambridge Inaugural Lecture (Kaldor, 1966). Verdoorn’s Law is usually interpreted to provide evidence of the existence of static and dynamic increasing returns within industry. Static returns relate mainly to economies of scale internal to the firm, whereas dynamic returns refer to increasing productivity derived from ‘induced’ technical progress, learning by doing, external economies in production, and so on. In this case, Kaldor’s interpretation is influenced by the work of Allyn Young (1928) who conceives increasing returns as a macroeconomic phenomenon based on the interaction between activities in the process of general economic expansion. Also, it echoes Adam Smith’s idea that increasing productivity is based on the division of labour, which in turn depends on the extension of the market.