DP15870 Institutions and the Productivity Challenge for European Regions

Author(s): Roberto Ganau, Andrés Rodríguez-Pose
Publication Date: March 2021
Keyword(s): Europe, Human Capital, Innovation, institutional quality, labour productivity, Physical Capital, regions
JEL(s): E24, J24, O47, R11
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15870

Europe has witnessed a considerable labour productivity slowdown in recent decades. Many potential explanations have been proposed to address this productivity 'puzzle'. However, how the quality of local institutions influences labour productivity has been overlooked by the literature. This paper addresses this gap by evaluating how institutional quality affects labour productivity growth and, particularly, its determinants at the regional level during the period 2003-2015. The results indicate that institutional quality influences regions' labour productivity growth both directly -as improvements in institutional quality drive productivity growth- and indirectly -as the short- and long-run returns of human capital and innovation on labour productivity growth are affected by regional variations in institutional quality.