Kaldor-Verdoorn's law and increasing returns to scale: A comparison across developed countries
Abstract
Purpose
The aim of this study is to investigate the validity of the Kaldor-Verdoorn's law in explaining the long-run determinants of the labor productivity growth for the manufacturing sector of some developed economies (Western European Countries, Australia, Canada, Japan and the USA).
Design/methodology/approach
The authors consider the period 1973-2006 using data provided by the European Commission – Economics and Financial Affairs. The method is instrumental variable. The robustness of estimates is checked by means of the Chow and the CUSUM and CUSUMQ tests. The authors consider the traditional specification of the dynamic Verdoorn law and the one which also includes investment to output ratio (I/Y), as a proxy of the capital growth rate, and the average labor cost growth, as a proxy of supply factors.
Findings
The findings suggest that the law is valid for the manufacturing as countries show increasing returns to scale. Capital growth and labor cost growth do not appear important in explaining productivity growth. The estimated Verdoorn coefficients are found to be substantially stable throughout the period.
Originality/value
The authors consider the most recent years, which has been characterized by a constant decline in the average GDP growth rates; a productivity growth decline; the long-term reduction in the manufacturing share of total employment. The authors examine the importance of alternative hypotheses such as those related to the existence of supply constraints. The authors check the stability of the KVL throughout the period under the consideration and across countries. The authors evaluate whether, in the case of the developed countries, economies of scale are significant.
Keywords
Acknowledgements
The authors are thankful to Sergio Destefanis, Matteo Lanzafame and to the session participants of the AISSEC conference (Perugia, 2009) for helpful comments and suggestions. The authors would like to thank one anonymous referee whose comments and suggestions greatly contributed to the improvement of this paper. The usual disclaimer applies.
Citation
Millemaci, E. and Ofria, F. (2014), "Kaldor-Verdoorn's law and increasing returns to scale: A comparison across developed countries", Journal of Economic Studies, Vol. 41 No. 1, pp. 140-162. https://doi.org/10.1108/JES-02-2012-0026
Publisher
:Emerald Group Publishing Limited
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