Can Europe stay productive? Macroeconomic and demographic pressures on labor productivity

Abstract

This study examines the impact of demographic shifts and broader macroeconomic factors on labor productivity in 23 European Union countries (EU-23) over the period 2005–2022. The analysis employs dynamic panel estimation techniques, including the Generalized Method of Moments (GMM), Random Effects (RE), and Autoregressive Distributed Lag (ARDL) models, to investigate the effects of population aging, unemployment, inflation, GDP per capita, research and development (R&D), life expectancy, and capital formation on productivity dynamics. Unit root and cointegration tests confirm the existence of long-run relationships among variables with different levels of integration. The findings indicate that inflation exerts a significant negative effect on productivity, whereas GDP per capita and R&D investment consistently enhance efficiency and output per worker. Life expectancy appears to have a negative impact, likely reflecting demographic pressures, while unemployment shows an unexpected positive association with productivity – possibly due to structural changes in the labor market and the adoption of new technologies. The ARDL error-correction model confirms long-run convergence, with persistent effects of productivity determinants over time. Overall, the results suggest that sustaining productivity growth in Europe depends on macroeconomic stability, innovation, human capital accumulation, and demographic adaptation.