Tertiarization, productivity and aggregate demand: evidence-based policies for European countries

Abstract

Over the last two decades, mature European countries have experienced a slackening in economic growth and stagnating labor productivity. Such a stagnating productivity may result both from poor ‘within sector’ growth and/or ‘structural change’ toward the service sectors. Productivity growth in turn impacts economic and social sustainability in various ways: in particular, it matters for preserving trade balance sustainability at a high level of output and employment and it enhances the scope for preserving and improving welfare systems in the face of an ageing population. The contribution of this paper with regard to these issues is twofold. First, by means of a shift-share analysis, we assess the weight of ‘structural change’ versus ‘within sector’ growth in affecting overall productivity dynamics. Second, we investigate empirically the impact of demand factors on ‘within sector’ productivity growth by testing the Kaldor-Verdoorn law in selected European countries. To do so, we estimate long-run productivity elasticity to autonomous demand by using an ARDL (Autoregressive Distributed Lag) cointegration-based methodology for the 1970–2015 timespan. Findings show that: (i) productivity growth is mainly driven by the ‘within sector’ effect, with a relatively small role played by tertiarization, particularly in the most recent phase (1999–2015); and (ii) autonomous demand growth is relevant in determining productivity dynamics, especially in manufacturing and in the private sector of the economy. A major policy implication is that coordinated expansionary macroeconomic policies would matter for productivity growth in the EU, and at the same time contribute to sustaining employment.