Over the last 30 to 40 years the manufacturing sector has declined in most developed economies, at least in terms of its share of gross domestic product. Despite this, it remains a vitally important part of all such economies because a great deal of the innovation and productivity growth which is essential for a dynamic economy originates in this sector. In this article we will investigate the determinants of productivity growth in manufacturing and, in particular, the relationship between productivity and output growth.
The hypothesis that productivity and output growth are positively related goes back to the 1940s and the work of the Dutch economist Petrus Verdoorn. As a result, this relationship is often called ‘Verdoorn’s law’ although it is also referred to as ‘Kaldor’s second law’ following subsequent work by the Cambridge economist Nicholas Kaldor.
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