Productivity puzzle in European regions: A Kaldor–Verdoorn approach

Abstract The objective of this study is to examine the productivity puzzle in Europe by employing the augmented Kaldor–Verdoorn law. The analysis is conducted using a panel of 277 European NUTS2 regions, encompassing twenty-seven EU countries, during the period from 1980 to 2017. The Kaldor–Verdoorn law is a well-researched empirical pattern that connects demand growth to productivity growth. It suggests that an increase in productivity is driven by an increase in demand. Recent studies have expanded on the traditional Kaldor–Verdoorn law by incorporating the Kaldorian technical progress function. This addition suggests that productivity is also influenced by investments, as technical progress is embedded in newly installed capital goods. The findings of this research reveal regional disparities in both the Verdoorn effect and the capital accumulation effect across European regions. Furthermore, the analysis tests the Kaldor–Verdoorn law across regions divided into quartiles based on productivity growth levels. The results highlight a non-linearity in the Kaldor–Verdoorn coefficients based on the regions’ productivity growth rates. Moreover, notable variations exist between economic sectors and among regions with and without the euro currency.