R&D, wages and productivity nexus: evidence from European regions

Purpose In the Fourth Industrial Revolution, investment in knowledge-based assets (e.g. R&D) is pivotal in explaining productivity at the micro- and macro-level. This study especially disentangles the impact of business, government, university R&D and real wage growth on total factor productivity (TFP). Design/methodology/approach This empirical study uses aggregate-level panel data on 264 European regions at the NUTS2 level from 2000 to 2016. For estimation, system generalised method of moments (GMM) is implemented. To measure TFP, we use the Törnqvist index method. Findings The empirical evidence indicates that expenditure on R&D (business, government and higher education) positively and significantly affects TFP in European regions, albeit the interactive effect of business and government R&D expenditure reduces TFP due to their substitution effect, especially in regions from the peripheral countries. In addition, we also estimate the impact of real wage growth on TFP; an increase in real wage growth induces TFP across European regions. Originality/value This research study for the first time assesses the different types of R&D and real wage growth (simultaneously) on TFP across European regions. In addition to R&D, real wage growth and TFP link, the novelty of the paper also lies in the TFP measurement, which captures the technical efficiency and technological progress at the regional level based on the Törnqvist index method. From a policy point of view, our results imply that investment in knowledge-based sources such as R&D, whether from the private or public sector, would increase productivity. On the other hand, to reduce regional disparity, the gain in productivity must be shared with the workers in the form of high real wages across European regions.