Employment, productivity and models of growth in the EU

Purpose – The purpose of this paper is to identify the main “models of growth” characterising the EU countries in the last two decades, with particular reference to the employment-productivity relationship, and to reveal the key determinants of productivity. Design/methodology/approach – After a survey of the relevant literature, the empirical section analyses the “models of growth” by graphical inspection, identifying four models (for EU-27 in the 1990-2008 period): extensive, intensive, virtuous, and stagnant. Then different econometric investigations (beta convergence, dynamic panel with GMM estimation, fixed effects panel, cross-section) are used to test the “diminishing returns of employment rate” hypothesis (for the 2000-2006 period), to assess the convergence processes and to determine the key variables affecting productivity. Findings – The main finding is the confirmation of the hypothesis mentioned: high employment growth is likely to lead to slower productivity growth. Moreover, besides verifying the beta convergence of productivity per worker, the most significant determinants of productivity are the following: education, a transition index, some structural indicators, and a “shadow economy” proxy. Finally, the descriptive analysis shows that “old” EU countries, coming from two decades of “jobless growth”, shifted to an “extensive” growth model; in contrast, transition countries (NMS) followed the opposite path: reducing employment and raising productivity. Research limitations/implications – It would be advisable to extend the period of the analysis, as soon as new data become available. Practical implications – The main policy implication is to get the EU Lisbon strategy – i.e. to create “more and better” jobs – working effectively. Originality/value – The most original finding is the clear assessment of an employment-productivity trade-off. Also, the different models of growth are categorised simply and effectively.