Sources of productivity growth: an empirical analysis with German sectoral data

Many theoretical analyses of the sources of economic growth focus on knowledge spillovers and scale economies to explain growth endogenously. The contribution of this paper is to shed some light on these arguments by an empirical investigation based on a production function framework. Sectoral production functions are estimated with annual German data of 51 sectors from 1960–90. The estimates reveal that both a pure Solow growth model and a Solow model augmented with human capital cannot account for the observed productivity increases. The model should be extended by allowing for inter-industry spillovers and scale economies at the aggregate level, as well as for scale economies associated with human capital at the sectoral level. The business cycle affects observed productivity changes in the short run and in the long run.