Abstract
This paper examines ‘Verddorn’s Law’, i.e. the relation between employment and output growth across the NUTS-3 regions of the European Union. Moreover, an explanation is provided as to how ‘Verdoorn’s Law’ sets up a process of cumulative causation. Following the relevant literature, the empirical assessment is conducted using spatial econometric techniques. The empirical results provide considerable support to the validity of ‘Verdoorn’s Law’. A more detailed analysis suggests that differences in regional growth rates perpetuate a ‘dualistic’ situation Europe, with advanced regions growing at the expanse of less-developed regions.
The findings, interpretations and conclusions are entirely those of the author and, do not necessarily represent the official position, policies or views of the Ministry of Rural Development & Foods and/or the Greek Government.
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Notes
- 1.
- 2.
Increasing returns to scale turn out to be essential for explaining the uneven geographical distribution of economic activity (Scotchmer and Thisse, 1992, call this the ‘folk theorem of spatial economics’).
- 3.
Nevertheless, Verdoorn (1959) argues that this relationship holds only as an asymptotic case of long-run equilibrium development.
- 4.
Beginning by arguing that there is a common intellectual basis between development economics and economic geography, these factors were ‘rediscovered’ by Krugman (1991, 1995). In the words of Krugman (1995): ‘Both development economics and economic geography experienced a flowering after World War II, resting on the same basic insight: the division of labour is limited by the extent of the market, but the extent of the market is in turn affected by the division of labour. The circularity of this relationship means that countries may experience self-reinforcing industrialisation (or failure to industrialise), and that regions may experience self-reinforcing agglomeration’ (p. 3).
- 5.
It might be argued that Verdoorn (1949) provides an algebraic formulation of Young’s verbal model.
- 6.
This is an indispensable element of Kaldor’s growth model (Molana and Vines, 1989).
- 7.
See McComie et al., (2002) for a more detailed review.
- 8.
This holds not only internationally, but also even more so across regional economies. As Thirlwall (1980a) argues, regional problems are essentially, balance-of-payment problems.
- 9.
A similar process is implied by Fujita et al. (2001).
- 10.
This possibility is pointed out early by economic geographer. Abler et al. (1970), for example, argue that ‘Spatial structure and spatial process are circularly causal. Structure is a determinant of the process as much as process is a determinant of structure.’ ( p. 60) [emphasis in the original].
- 11.
Such an outcome is implied by a new generation of growth models; those belonging to New Economic Geography (NEG). A more detailed treatment of NEG is encapsulated in Fujita et al. (2001), Gruber & Soci (2010), Ottaviano (2007) together with a critical assessment of these models. For a more detailed review see Fingleton (2007).
- 12.
There are though a few notable theoretical exemptions. Roberts (2002), for example, argues that increasing real wages in conjunction with labour shortages might result to a slow-down in the process of cumulative causation.
- 13.
Berant (1996) notes that spatial autocorrelation invalidates OLS regressions in a way similar to heteroscedasticity and serial autocorrelation and the estimated coefficients will be biased.
- 14.
It is important to note that Verdoorn (1949) suggested that the relationship between the growth of productivity and the growth of employment could be used to forecast labour requirements and hence to give ‘a rough idea of how much industrial productivity must be expand to absorb a certain availability of labour’ (p. 4) [emphasis added]. Although this suggest another application of the ‘Verdoorn’s Law’ and opens up a promising area of research, nevertheless, it goes beyond of the scope of this paper.
- 15.
As a rule of thumb, the best fitting model is the one that yields the minimum values for the AIC or the SBC criterion. The SBC test has superior properties and is asymptotically consistent, whereas the AIC is biased towards selecting an overparameterized model.
- 16.
Disenchantment and scepticism with equilibrium ideas runs through geographical analysis. Indicatively, consider the following passage from Smith (1967): ‘It is the periods and processes of geographical change, of active settlement and colonisation, of urban foundation and growth, or of industrial and commercial change, that stimulate most interest and that have been most significant in the formation of landscape (p. vi)’. Indeed, as Chisholm (1975) notes ‘Smith stresses the importance of processes generating change and thereby adverts to an age-old problem […], namely how to infer the causal chain of processes from observed spatial patterns (p. 116)’.
- 17.
- 18.
Several studies point out that there is a process of regional convergence in the EU (e.g. Corrado et al, 2005). Indeed, most studies find a negative relation between growth rates and the initial level of productivity. Richardson (1984), however, notes “In the relatively near future, an opportunity will develop to test the appropriateness of the neoclassical compared with the cumulative causation model. The key question is whether regional per capita income will stabilise close to equality (i.e. an approximation to neoclassical equilibrium) or whether they will cross over, with the 4 lower income regions (S. Atlantic, East South Central, West South Central and Mountain) then becoming progressively richer than the 4 regions of the Northeast and Midwest. The latter development would be more consistent with the cumulative causation model. The competing hypotheses of interregional income equilibrium and the “cross over” is the most intriguing question in contemporary regional economics” (pp. 22–23).
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Alexiadis, S. (2023). Economies of Scale and Cumulative Causation. In: Ishikawa, T., Nakamura, D. (eds) Industrial Location and Vitalization of Regional Economy. Springer, Singapore. https://doi.org/10.1007/978-981-19-8128-9_3
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