Skip to main content
SpringerLink
Log in

The effects of public expenditures on labour productivity in Europe

Empirica volume 48, pages 845–874 (2021)Cite this article

Abstract

In this paper, we analyse the effects of public expenditures and their structure on productivity growth in industry and services in the European Union (EU) countries (1996–2017). We also control for the share of expenditures made by central governments. We find that productivity growth in industry decreases with government expenditures on environmental protection. As for services, productivity growth declines with military expenditures and increases with the centralisation of expenditures on public order and safety. These effects are mainly noted in Eastern European countries, and are less pronounced in Western Europe. Lower corruption increases productivity growth. Furthermore, our estimates suggest that there is a convergence in productivities across EU member states, with convergence faster in the service sector than in the industrial sector. These findings carry important policy implications.

This is a preview of subscription content, access via your institution.

Access options

Buy single article

Instant access to the full article PDF.

USD 39.95

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Data availability

Data and code could be found in Mendeley: https://doi.org/10.17632/52yrvfn5dj.2

Notes

  1. This includes: BG, CZ, DK, DE, EE, GR, ES, FR, IT, LV, LU, HU, NL, AT, PL, PT, SI, SK, FI, SE, UK.

  2. The exact definitions of COFOG categories of government expenditures can be found on the Eurostat page: https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Glossary:Classification_of_the_functions_of_government_(COFOG)

References

  • Ada AA (2014) Environmental protection expenditure and economic growth: a panel data analysis for the EU and Turkey. Br J Econ 9:2

    Google Scholar 

  • Aguayo-Rico A, Guerra-Turrubiates IA, Montes R, Estudios T, Monterrey S (2005) Empirical evidence of the impact of health on economic growth. J Econ Hist 14:699–749

    Google Scholar 

  • Albrizio S, Botta E, Koźluk T, Zipperer V (2014) Do environmental policies matter for productivity growth? OECD Department Working Papers No. 1176

  • Alesina A, Angeloni I, Schuknecht L (2005) What does the European Union do? Public Choice 123:275–319

    Article  Google Scholar 

  • Arellano M (1987) Computing robust standard errors for within-group estimators. Oxford Bull Econ Stat 49(4):431–434

    Article  Google Scholar 

  • Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58(2):277–297

    Article  Google Scholar 

  • Arestis P (2011) European economic and monetary union policies from a Keynesian perspective. Mod Guide Keynes Macroecon Econ Policies Chapter 8:191–214

    Google Scholar 

  • Aschauer DA (1989) Is public expenditure productive? J Monet Econ 23(2):177–200

    Article  Google Scholar 

  • Auci S, Castellucci L, Coromaldi M (2021) How does the public spending affect technical efficiency? Some evidence from 15 European countries. Bull Econ Res 73(1):108–130. https://doi.org/10.1111/boer.12236

    Article  Google Scholar 

  • Bardhan P, Mookherjee D (2006) Decentralization, corruption and government accountability. IntHandb Econ Corrupt 6:161–188

    Google Scholar 

  • Barro RJ, Redlick CJ (2011) Macroeconomic effects from government purchases and taxes. Q J Econ 126(1):51–102

    Article  Google Scholar 

  • Bayraktar N, Moreno-Dodson B (2015) How can public spending help you grow? An empirical analysis for developing countries. Bull Econ Res 67(1):30–64

    Article  Google Scholar 

  • Berger M, Harendt C, Heinemann F, Moessinger M-D, Schwab T, Weiss S (2017) How Europe can deliver: optimizing the division of competences among the EU and its member states. Bertelsmann Stiftung, Gütersloh

    Google Scholar 

  • Bergh A, Henrekson M (2011) Government size and growth: a survey and interpretation of the evidence. J Econ Surv 25(5):872–897

    Article  Google Scholar 

  • Bloom DE, Canning D (2000) The health and wealth of nations. Science 287(5456):1207–1209

    Article  Google Scholar 

  • Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econom 87(1):115–143

    Article  Google Scholar 

  • Bose N, Haque ME, Osborn DR (2007) Public expenditure and economic growth: a disaggregated analysis for developing countries. ManchSch 75(5):533–556

    Google Scholar 

  • Brenton S (2016) Types of Fiscal Rules. In: Brenton S (ed) The politics of budgetary surplus. Palgrave Macmillan, London, pp 61–93

    Chapter  Google Scholar 

  • Breusch TS (1978) Testing for autocorrelation in dynamic linear models. Aust Econ Pap 17(31):334–355

    Article  Google Scholar 

  • Burtless GT, Haveman RH (1987) Taxes and transfers: How much economic loss? Challenge 30(1):45–51

    Article  Google Scholar 

  • D’Agostino G, Dunne JP, Pieroni L (2012) Corruption, military spending and growth. Def Peace Econ 23(6):591–604

    Article  Google Scholar 

  • Delavallade C (2006) Corruption and distribution of public spending in developing countries. J Econ Financ 30(2):222–239

    Article  Google Scholar 

  • Dudzevičiūtė G, Šimelytė A, Liučvaitienė A (2018) Government expenditure and economic growth in the European Union countries. Int J Soc Econ 45(2):372–386

    Article  Google Scholar 

  • Fadic M, Garda P, Pisu M (2019) The effect of public sector efficiency on firm-level productivity growth: The Italian case. OECD Economic Department Working Papers, No 1573

  • Fedotenkov I, Schneider F (2018) Military expenditures and shadow economy in the central and Eastern Europe: is there a link? Central Eur Econ J 5(1):142–153

    Article  Google Scholar 

  • Ferreiro J, Garcia-Del-Valle MT, Gomez C (2009) Is the composition of public expenditures converging in EMU countries? J Post Keynes Econ 31(3):459–484

    Article  Google Scholar 

  • Fisman R, Gatti R (2002) Decentralization and corruption: evidence across countries. J Public Econ 83(3):325–345

    Article  Google Scholar 

  • Granger CWJ (1969) Investigating Causal Relations by Econometric Models and Cross-spectral Methods. Econometrica 37(3):424–438

    Article  Google Scholar 

  • Godfrey LG (1978) Testing against general autoregressive and moving average error models when the regressors include lagged dependent variables. Econometrica 46(6):1293–1301

    Article  Google Scholar 

  • Gupta S, de Mello L, Sharan R (2001) Corruption and military spending. Eur J Polit Econ 17:749–777

    Article  Google Scholar 

  • Hansson P, Henrekson M (1994) A new framework for testing the effect of government spending on growth and productivity. Public Choice 81(3–4):381–401

    Article  Google Scholar 

  • Harris RG (2002) Social Policy and productivity growth: what are the linkages? In: Sharpe A, St-Hilaire F, Banting K (eds) The review of economic performance and social progress 2002. Towards a social understanding of productivity.Centre for the Study of Living Standards, Ottawa, ON; Institute for Research on Public Policy, Montreal, QC, vol 2, pp 277–306

  • Hessami Z (2014) Political corruption, public procurement, and budget composition: theory and evidence from OECD countries. Eur J Polit Econ 34:372–389

    Article  Google Scholar 

  • Hofman B, Kaiser K, Schulze GG (2009) Corruption and decentralization. Decentralization and Regional Autonomy in Indonesia, Institute for Southeast Asian Studies, Singapore, pp 99–113

    Google Scholar 

  • Howitt P (2005) Health, human capital, and economic growth: a schumpeterian perspective. Health Econ Growth Find Policy Implic 1:19–40

    Google Scholar 

  • Hubbard RG, Skinner J, Zeldes SP (1995) Precautionary saving and social insurance. J Polit Econ 103(2):360–399

    Article  Google Scholar 

  • Ilzetzki E (2011) Rent-seeking distortions and fiscal procyclicality. J Dev Econ 96(1):30–46

    Article  Google Scholar 

  • Im KS, Pesaran MH, Shin Y (2003) Testing for unit roots in heterogeneous panels. J Econom 115(1):53–74

    Article  Google Scholar 

  • Irmen A, Kuehnel J (2009) Productive government expenditure and economic growth. J Econ Surv 23(4):692–733

    Article  Google Scholar 

  • Jajkowicz O, Drobiszová A (2015) The effect of corruption on government expenditure allocation in OECD countries. ActaUniversitatisAgriculturae et SilviculturaeMendelianaeBrunensis 63(4):1251–1259

    Google Scholar 

  • Kazarosian M (1997) Precautionary savings—a panel study. Rev Econ Stat 79(2):241–247

    Article  Google Scholar 

  • Kopits MG, Symansky MSA (1998) Fiscal policy rules. International Monetary Fund

    Book  Google Scholar 

  • Kozluk T, Zipperer V (2015) Environmental policies and productivity growth. OECD J Econ Stud 2014(1):155–185

    Article  Google Scholar 

  • Kregel JA (1994) The viability of economic policy and the priorities of economic policy. Journal of Post Keynesian Economics 17(2):261–277

    Article  Google Scholar 

  • Linnemann L, Schabert A (2006) Productive government expenditure in monetary business cycle models. Scott J Polit Econ 53(1):28–46

    Article  Google Scholar 

  • Linnemann L, Gábor BU, Wagner M (2016) Government spending shocks and labor productivity (SFB 823 Discussion Paper No. 9/2016). TU Dortmund University, Dortmund

  • Lupu D, Petrisor MB, Bercu A, Tofan M (2018) The impact of public expenditures on economic growth: a case study of Central and Eastern European countries. Emerg Mark Financ Trade 54(3):552–570

    Article  Google Scholar 

  • Maddala GS, Wu S (1999) A comparative study of unit root tests with panel data and a new simple test. Oxford Bull Econ Stat 61(S1):631–652

    Article  Google Scholar 

  • Miron J (2010) The negative consequences of government expenditure (No. 10–55). Working Paper. Mercatus Center, George Mason University

  • Mo PH (2007) Government expenditures and economic growth: the supply and demand sides. Fisc Stud 28(4):497–522

    Article  Google Scholar 

  • Mundlak Y (1978) On the pooling of time series and cross section data. Econometrica 46(1):69–85

    Article  Google Scholar 

  • Nijkamp P, Poot J (2004) Meta-analysis of the effect of fiscal policies on long-run growth. Eur J Polit Econ 20(1):91–124

    Article  Google Scholar 

  • Oates WE (1999) An essay on fiscal federalism. J Econ Lit 37:1120–1149

    Article  Google Scholar 

  • Oates WE (2005) Toward a second-generation theory of fiscal federalism. Int Tax Public Financ 12(4):349–373

    Article  Google Scholar 

  • Prud’Homme R (1995) The dangers of decentralization. World Bank Res Obs 10(2):201–220

    Article  Google Scholar 

  • Ramirez MD (1998) Does public investment enhance labor productivity growth in Chile? A cointegration analysis. North Am J Econ Financ 9(1):45–65

    Article  Google Scholar 

  • Ramirez MD (2009) Does public investment enhance labor productivity growth in Argentina? A cointegration analysis (Working Paper No. 57). Department of Economics, Yale University, New Haven, CT

  • Romero-Avila D, Strauch R (2008) Public finances and long-term growth in Europe: evidence from a panel data analysis. Eur J Polit Econ 24(1):172–191

    Article  Google Scholar 

  • Sáez MP, Álvarez-García S, Rodríguez DC (2017) Government expenditure and economic growth in the European Union countries: New evidence. Bull Geogr Socio-Econ Series 36(36):127–133

    Article  Google Scholar 

  • Salotti S, Trecroci C (2016) The impact of government debt, expenditure and taxes on aggregate investment and productivity growth. Economica 83(330):356–384

    Article  Google Scholar 

  • Sanders JM (1992) Short-and long-term macroeconomic returns to higher education. SociolEduc 65(1):21–36

    Google Scholar 

  • Soubbotina TP (2004) Beyond economic growth: an introduction to sustainable development. The World Bank, 2nd edn. Washington, D.C

    Book  Google Scholar 

  • Strauss J, Thomas D (1998) Health, nutrition, and economic development. J Econ Lit 36(2):766–817

    Google Scholar 

  • Tiebout CM (1956) A pure theory of local expenditures. J Polit Econ 64(5):416–424

    Article  Google Scholar 

  • Wang Y (2020) Growth and development under different corruption regimes. ManchSch 88(2):305–323

    Google Scholar 

  • Well DN (2007) Accounting for the effect of health on economic growth. Q J Econ 122(3):1265–1306

    Article  Google Scholar 

  • Wu S, Li B, Nie Q, Chen C (2017) Government expenditure, corruption and total factor productivity. J Clean Prod 168:279–289

    Article  Google Scholar 

  • Yao Y (2019) Does higher education expansion enhance productivity? J Macroecon 59:169–194

    Article  Google Scholar 

Download references

Funding

This work was not supported by any grant or other type of external funding.

Author information

Authors and Affiliations

  1. Joint Research Center, European Commission, Rue du Champ de Mars, 21, 1050, Brussels, Belgium

    Igor Fedotenkov

  2. Department of Economics, University of Pretoria, Pretoria, 0002, South Africa

    Rangan Gupta

Authors
  1. Igor Fedotenkov
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Rangan Gupta
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Igor Fedotenkov.

Ethics declarations

Conflict of interest

The authors declare that they have no conflict of interest.

Additional information

Responsible Editor: Fritz Breuss.

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

We would like to thank two anonymous referees for many helpful comments. However, any remaining errors are solely ours.

Appendices

Appendix 1

Tables

Table 4 Definitions of variables
Full size table

4,

Table 5 Descriptive statistics
Full size table

5 and

Table 6 Selected correlations
Full size table

6.

Appendix 2

Tables

Table 7 Dynamic model results for services
Full size table

7 and

Table 8 Dynamic model results for industry
Full size table

8.

Rights and permissions

Reprints and Permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Fedotenkov, I., Gupta, R. The effects of public expenditures on labour productivity in Europe. Empirica 48, 845–874 (2021). https://doi.org/10.1007/s10663-021-09505-w

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10663-021-09505-w

Keywords

JEL Classification

search

Navigation