Demand and Supply-side Drivers of Labour Productivity Growth: an empirical assessment for G7 countries

The recent slowdown in labour productivity growth experienced in advanced economies is generally considered one of the main causes of the current phase of economic stagnation. This has led scholars to carry out a number of theoretical and empirical studies to identify the long-run determinants of productivity growth. The present work aims to fall within this debate, with a peculiar focus on the relevance of the Kaldor-Verdoorn law. To this purpose, we empirically investigate on the determinants of labour productivity growth both for the total economy and for the manufacturing sector, comparing the role played by demand- and supply-side factors. A Structural Vector Autoregressive (SVAR) model is estimated for G7 countries from 1970 to 2017. Although the analyses confirm the positive role of supply-side factors in fostering productivity growth, our findings generally validate also the relevance of demand-side factors. Additionally, the positive effect generated by demand factors on labour productivity growth suggests that supply-side measures would be not sufficient to enhance productivity. Our findings suggest that demand-side policies are likely to foster productivity by also stimulating supply-side factors, particularly in the manufacturing sector of the economy.