Verdoorn's law is named after Dutch economist Petrus Johannes Verdoorn (1949). It states that in the long run productivity generally grows proportionally to the square root of output. In
economics
Economics () is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...
, this law pertains to the relationship between the growth of output and the growth of
productivity
Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production proces ...
. According to the law, faster growth in output increases productivity due to
increasing returns
In economics, diminishing returns are the decrease in marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, holding all other factors of production equal (ceteris paribu ...
. Verdoorn (1949, p. 59) argued that "in the long run a change in the volume of production, say about 10 per cent, tends to be associated with an average increase in labor productivity of 4.5 per cent." The Verdoorn coefficient close to 0.5 (0.484) is also found in subsequent estimations of the law.
Description
Verdoorn's law describes a simple long-run relation between productivity and output growth, whose coefficients were empirically estimated in 1949 by the Dutch economist.
The relation takes the following form:
where p is the labor productivity growth, Q the output growth (value-added), b is the Verdoorn coefficient and a is the exogenous productivity growth rate.
Verdoorn's law differs from "the usual hypothesis
€¦that the growth of productivity is mainly to be explained by the progress of knowledge in science and technology",
as it typically is in neoclassical models of growth (notably the
Solow model Solow is a surname. Notable people with the surname include:
* Alan Solow, an American lawyer and Jewish leader
* Herbert Solow (journalist) (1903–1964), an American journalist
* Herbert Franklin Solow (1931–2020), an American producer, direct ...
). Verdoorn's law is usually associated with cumulative causation models of growth, in which demand rather than supply determine the pace of accumulation.
Nicholas Kaldor
Nicholas Kaldor, Baron Kaldor (12 May 1908 – 30 September 1986), born Káldor Miklós, was a Cambridge economist in the post-war period. He developed the "compensation" criteria called Kaldor–Hicks efficiency for welfare comparisons (1939), ...
and
Anthony Thirlwall
Anthony Philip Thirlwall (born 1941) is Professor of Applied Economics at the University of Kent. He has made major contributions to regional economics; the analysis of unemployment and inflation; balance of payments theory, and to growth and deve ...
developed models of
export-led growth
Export-oriented industrialization (EOI) sometimes called export substitution industrialization (ESI), export led industrialization (ELI) or export-led growth is a trade and economic policy aiming to speed up the industrialization process of a ...
based on Verdoorn's law. For a given country an expansion of the export sector may cause specialisation in the production of export products, which increase the productivity level, and increase the level of skills in the export sector. This may then lead to a reallocation of resources from the less efficient non-trade sector to the more productive export sector, lower prices for traded goods and higher competitiveness. This productivity change may then lead expanded exports and to output growth.
Thirlwall (1979) shows that for several countries the rate of growth never exceeds the ratio of the rate of growth of exports to income elasticity of demand for imports. This implies that growth is limited by the balance of payments equilibrium. This result is known as
Thirlwall's Law Thirlwall's law (named after Anthony Thirlwall) states that if long run balance of payments equilibrium on current account is a requirement, and the real exchange rate stays relatively constant, then the long run growth of a country can be approxima ...
.
Sometimes Verdoorn's law is called Kaldor-Verdoorn's law or effect.
References
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Notes
Economics laws
Eponyms
1949 in economics