Productivity Growth, Smith Effects and Ricardo Effects in Euro Area’s manufacturing Industries

We analyse the determinants of labour productivity across (a sample of) EA member states. We focus on the divergent dynamics before and after the financial crisis, and of core countries relative to peripheral countries. We ground our empirical analysis in Paolo Sylos-Labini's productivity equations. We test different models, including a Panel 2S-LS model and a Panel vector autoregression model. Our preliminary findings confirm and strengthen Sylos-Labini's main insights. Labour productivity in manufacturing industries is strongly and positively correlated with the market size (Smith effect), the relative cost of labour (Ricardo effect), the absolute cost of labour (organization effect) and past investment, whereas it is negatively correlated with current investment. Furthermore, we find evidence that the crisis has affected the size of these effects. Focusing on the core periphery dichotomy, the signs of the effects are the same for both groups of countries, although the Smith, Ricardo and long-run investment effects are usually stronger for core countries compared to peripheral countries. The opposite holds for the organization effect, while investment effects are less clear.