The productivity challenge. What to expect from better-quality labour and capital inputs?

Vandenberghe, Vincent [UCL]

The aim of this article is to develop and implement an analytical framework assessing whether better-quality inputs, via a rise of TFP, could compensate an ageing-induced slowing of economic growth. Here ‘better-quality’ means more educated and older/more experienced workforces; and also better-quality capital proxied by its ICT content. Economic theory predicts that these trends should raise TFP. To assess these predictions, we use EU-KLEMS data, with information on the age/education mix of the workforce, as well as the importance on ICT in total capital, for 34 industries within 16 OECD countries, between 1970 and 2005. We generalize the Hellerstein–Neumark labour-quality index method to simultaneously capture workers’ age/experience or education contribution to TFP growth, alongside that of ICT. The conclusion of the article is that the quality of inputs matters for TFP. We find robust microeconometric evidence that better-educated and older/more experienced workers are more productive than their less-educated and younger/less-experienced peers. Also, ICT capital turns out to be more productive than other forms of capital. And when used in a growth accounting exercise covering the 1995–2005 period, these estimates suggest that up to 40% of the recorded TFP growth could be ascribed to the rising quality of inputs.