Productivity in the European Union: Do Labour Market Institutions Really Matter?

In recent years, many policy papers have suggested that the institutional setup of the labour markets have considerable influence on the economic performance. But, what about the European Union? Is the declining trend of the European productivity connected with the European labour market institutions? This paper investigates the impact of selected labour market institutions and their interactions on the total factor productivity growth in 19 EU member states. As basis for the empirical analysis, an endogenous growth model extended by institutions is derived. As analytical tool, panel data model is applied. The analysis covers the period from 1995 to 2013. Data for total factor productivity growths were calculated using growth accounting method. The results suggest that labour market institutions really matter, in the sense that they are statistically significant in explaining the European total factor productivity growth in the analysed period.