Effects of Output on Productivity in Austria and the EU

The present study econometrically estimates the Verdoorn effect in Austria and the EU. Significant effects are found for the total economy as well as the industrial sector. Accordingly, an increase by 1 percent in total and industrial output, respectively, increases labour productivity by up to 0.5 percent. Considering endogenous feedback mechanisms between output, productivity and capital accumulation by means of impulse response functions, these effects are even larger. Weak economic growth has therefore also an impact on productivity growth and thus long-term economic wealth and competitiveness. Supply side policy measures thus need to be supplemented by strengthening aggregate demand.