The effects of public expenditures on labour productivity in Europe

In this paper, we analyse the effects of public expenditures and their structure on productivity growth in industry and services in the European Union (EU) countries (1996–2017). We also control for the share of expenditures made by central governments. We find that productivity growth in industry decreases with government expenditures on environmental protection. As for services, productivity growth declines with military expenditures and increases with the centralisation of expenditures on public order and safety. These effects are mainly noted in Eastern European countries, and are less pronounced in Western Europe. Lower corruption increases productivity growth. Furthermore, our estimates suggest that there is a convergence in productivities across EU member states, with convergence faster in the service sector than in the industrial sector. These findings carry important policy implications.