The Determinants of Total Factor Productivity in European Union

Abstract

The aim of this study is to investigate the effect of construction sector on Total Factor Productivity (TFP) in European Union economy by using panel data analysis and analyzing cross-sectional data of 24 European Union countries for the period 2003-2014. To this end, building permits, house prices, and construction index are used to examine the effect of housing sector dynamics and construction sector productivity on the total factor productivity in the general economy. The aim of study is to explain variation in the TFP across countries by the intensity of construction sector activities. It is observed that the coefficients of changes in nominal house prices and building permits are positive, and they have significant relationship with TFP as the coefficient of construction index is negative. Positive coefficients of changes in nominal house prices and building permits support our model. Construction index that measures that how costly the construction activity is also expected to have negative parameters that imply that as construction activity becomes more costly the contribution to TFP growth becomes less. That is, house construction and permits and house demand have positive effects on total factor productivity.