Spatial dependence and Kaldor's laws: Evidence for the European regions

Abstract

In this paper we provide an outline of Kaldor's growth model and tests its relevance to the economic experience of European regions during the 1984-1992 period. The Kaldor's first law asserts that manufacturing is the engine of economic growth. The second proposition, also known as Verdoorn's law, states that there is a strong positive relation between the productivity growth in manufacturing and the output growth of manufacturing. The third law suggests that overall productivity growth is positively related to output growth in manufacturing and negatively related to the employment of non manufacturing sectors. The empirical results, corrected for the presence of spatial autocorrelation, indicates that Kaldor's second and third laws are compatible with the economic growth of European regions during the period 1984-1992. Keywords: Kaldor's laws, regional economics, spatial autocorrelation