OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

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A revised approach to productivity convergence in long-term scenarios

The paper describes revisions to the trend labour efficiency component of the production function underpinning long-term economic scenarios. The main goal of the revision is to add more policy and institutional determinants in the equation to enrich the scenarios that can be constructed. In the proposed equation, equilibrium trend labour efficiency depends on a broad measure of the quality of institutions and governance (the World’s Bank rule of law indicator), human capital (based on average years of schooling attainment), product market regulation (PMR), openness to trade adjusted for country size, the stability of the macroeconomic framework (based on inflation and its variance), income inequality (based on GINI coefficients) as well as domestic and global research and development (via accumulated stocks of R&D). Apart from the innovation effects, the sizes of the other effects are jointly estimated in a conditional convergence framework with a sample of about 120 countries, without the use of country fixed effects. Rule of law and openness are also estimated to influence the speed of convergence toward the long-term equilibrium.


Keywords: conditional convergence, long-term model, rule of law, development, productivity, TFP, trend labour efficiency, openness, long-term scenarios, projections
JEL: C53: Mathematical and Quantitative Methods / Econometric Modeling / Forecasting and Prediction Methods; Simulation Methods; O43: Economic Development, Innovation, Technological Change, and Growth / Economic Growth and Aggregate Productivity / Institutions and Growth; O47: Economic Development, Innovation, Technological Change, and Growth / Economic Growth and Aggregate Productivity / Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
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