Why do Some Countries Produce So Much More Output Per Worker than Others?

TLDR

Output per worker varies enormously across countries. The study investigates how differences in institutions and government policies—termed social infrastructure—drive variations in capital accumulation, productivity, and output per worker. Social infrastructure is modeled as endogenous, historically determined by location and partly by language. Accounting analysis reveals that physical capital and education explain only part of output variation, with a large Solow residual differing across countries. The abstract contains a placeholder question “Why?”.

Abstract

Output per worker varies enormously across countries. Why? On an accounting basis our analysis shows that differences in physical capital and educational attainment can only partially explain the variation in output per worker—we find a large amount of variation in the level of the Solow residual across countries. At a deeper level, we document that the differences in capital accumulation, productivity, and therefore output per worker are driven by differences in institutions and government policies, which we call social infrastructure. We treat social infrastructure as endogenous, determined historically by location and other factors captured in part by language.