Verdoorn's Law – The Externalities Hypothesis and Economic Growth in the U.K.

This chapter describes Wickens Verdoorn's Law with cross-section data and quarterly time series data. It analyses the effects on economic growth of factors other than Verdoorn's Law and in particular it wish to analyse the effect of the Externalities Hypothesis. The chapter considers Kaldor's proposition about the effects of a labour transfer on the growth of output in the U.K. Verdoorn's Law does not hold for the U.K. manufacturing industry in the long-run. U.K. manufacturing industry is characterised by a short-run Verdoorn's Law which is anala-gous to Okun's Law. The Cripps-Tarling Proposition and, a fortiori, Kaldor's Proposition regarding the possibility of increased output growth by a transfer of labour do hold but are due almost entirely to the Externalities Hypothesis rather than Verdoorn's Law. The impact of the labour transfer on economic growth, though positive, is of little quantitative significance. Finally, it is possible to conduct a similar analysis considering an investment transfer instead of a labour transfer.