Working Paper: CEPR ID: DP4877
Authors: Francesco Caselli; Silvana Tenreyro
Abstract: We revisit Western Europe’s record with labour-productivity convergence, and tentatively extrapolate its implications for the future path of Eastern Europe. The poorer Western European countries caught up with the richer ones through both higher rates of physical capital accumulation and greater total factor productivity gains. These (relatively) high rates of capital accumulation and TFP growth reflect convergence along two margins. One margin (between industry) is a massive reallocation of labour from agriculture to manufacturing and services, which have higher capital intensity and use resources more efficiently. The other margin (within industry) reflects capital deepening and technology catch-up at the industry level. In Eastern Europe the employment share of agriculture is typically quite large, and agriculture is particularly unproductive. Hence, there are potential gains from sectoral reallocation. However, quantitatively the between-industry component of the East’s income gap is quite small. Hence, the East seems to have only one real margin to exploit: the within-industry one. Coupled with the fact that within-industry productivity gaps are enormous, this suggests that convergence will take a long time. On the positive side, however, Eastern Europe already has levels of human capital similar to those of Western Europe. This is good news because human capital gaps have proved very persistent in Western Europe’s experience. Hence, Eastern Europe does start out without the handicap that is harder to overcome.
Keywords: Labor Productivity; Convergence; Eastern Europe; Western Europe; Economic Growth
JEL Codes: O47; P20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| poorer Western European countries (O52) | labor productivity convergence (O47) |
| higher rates of physical capital accumulation (E22) | labor productivity convergence (O47) |
| total factor productivity (TFP) growth (O49) | labor productivity convergence (O47) |
| massive reallocation of labor from agriculture to more productive sectors (P23) | labor productivity convergence (O47) |
| capital deepening (E22) | labor productivity convergence (O47) |
| technology catch-up at the industry level (L63) | labor productivity convergence (O47) |
| within-industry productivity gaps (O49) | slow convergence process (O47) |
| lack of significant human capital accumulation (J24) | slow convergence process (O47) |