The Verdoorn Law: Some Evidence from Non-Parametric Frontier Analysis

In his inaugural Cambridge lecture, Kaldor (1966) refers to what he terms Verdoorn’s Law — the statistical relationship between the rate of growth of labour productivity and the rate of growth of output — as evidence of the pervasive existence in industrial economies of static and dynamic economies of scale. Since this contribution, it has often been suggested that attempts at estimating the law (including, of course, Kaldor’s own one) suffer from serious specification problems. As is well expressed by McCombie and Thirlwall (1994, p. 167), ‘the debate over the Verdoorn Law would make a good textbook example of the problems that can beset statistical inference!’ As can be seen from the surveys in Bairam (1987a) and in McCombie and Thirlwall (1994, ch. 2), problems with estimating the law are related to three major issues.