An Alternative Use of the Verdoorn Law at the Portuguese NUTs II Level

TL;DR

This study tests the validity of Verdoorn's Law in Portugal at regional and sectoral levels, examining the influence of additional variables like trade, capital, and labor, and confirms the robustness of the original law with economies of scale.

Contribution

It introduces additional variables to Verdoorn's Law to analyze their impact on economies of scale and regional divergence in Portugal.

Findings

Original Verdoorn's Law is robust at regional and sectoral levels.

Additional variables have limited influence on economies of scale.

Economies of scale are confirmed to be present in the Portuguese economy.

Abstract

With this study we want to test the validity of the well known "Verdoorn's Law" which considers the relationship between the growth of productivity and output in the case of the Portuguese economy at a regional and sectoral levels (NUTs II) for the period 1995-1999. The importance of some additional variables in the original specification of Verdoorn's Law is also tested, such as, trade flows, capital accumulation and labour concentration. The main objective of the study is to confirm the presence of economies to scale that characterise the polarisation process with cumulative causation properties, explaining regional divergence. By introducing new variables to the original specification of Verdoorn's Law we intend to examine how the economies to scale are influenced by the consideration of factors related to the Polarisation (Keynensian tradition) and Agglomeration (spatial economics tradition) phenomena. The results obtained from the regression analysis based on panel estimation show that the original specification of Verdoorn's Law is more robust and confirm the presence of increasing economies to scale at both, regional and sectoral levels. However, the additional variables related to trade flows, capital accumulation and labour concentration have few influence on the performance of economies to scale (1)(Martinho, 2011).