Determinants of trend TFP growth and key policies that influence it

The decline in productivity growth in the euro area, as well as in the EU overall, and the slow-down in catching-up with US productivity levels in the last decade has been spurring policy debates on how to re-launch total factor productivity (TFP) growth. The efficiency in the use of inputs in production and technological progress — as captured by TFP — is seen ultimately as the only source of long-term growth. To better understand the underlying causes of these dynamics, we empirically test for catchingup and spill-overs with the US and explore potential determinants of trend TFP growth using an errorcorrection model. While we do not find evidence for catching-up (or convergence in TFP levels) of euro area countries with the US, we find evidence for (upward or downward) convergence in TFP growth rates (a result that holds for other groupings of EU Member States too). Convergence in growth rates can be explained by spill-overs stemming, for instance, from technological adoption or imitation and also by the global impact of the economic crisis. Spill-over effects with the US are found to be strong. The quality of education, business investment in intangible capital, public R&D expenditure, trade openness and policies fostering job transitions and self-employment are found to be positively associated with trend TFP growth. On the contrary, an ageing workforce is found to be negatively associated with it. While this analysis does not provide the answer to the widely discussed 'productivity puzzle', it sheds some light on factors that could play a role in determining the long-run dynamics of TFP growth in the euro area and beyond (69).