Sectoral Approach in Output Growth Decomposition and its Determinants in Europe

Abstract

The structural changes in Europe have occurred over the last several decades, reducing output share in the goods sector, while increasing its share in overall services. Applying the growth accounting approach, we decomposed output growth in the economy while following the sectoral approach, in ten individual sectors in twenty-six European countries, from 2000 to 2019. Our analysis shows that total factor productivity has accounted for almost half of the European countries' growth in output in the last two decades, with the other half primarily accounted for by increases in fixed asset growth and employment growth, while its variations among sectors are significant. The output growth in the services sector is significantly more driven by employment growth than in the goods sector, leading to overall employment growth in the economy. Applying the panel pooled OLS model, we found that the relevance of expenditures for research and development is high and positive in all sectors, but higher in industry and knowledge-intensive services (information and communication, scientific activities) compared to all sectors average. To the best knowledge of the author, this is the first study presenting output growth decomposition estimates at the sectoral level for a selected group of countries, but also the first study presenting estimates of TFP in the total economy for a selected time periods. In addition, this is the first study that presents the relevance of investment in research and development at the sectoral level in this specific time period and group of countries. Results of the study may be used in defining national policies priorities, as there are varieties among sectors in terms of their impact on employment and economic growth.