The Rule of Law and Labor Productivity Growth by Businesses: Evidence for the EU, 1998–2005

Abstract

This contribution analyses the relationship between the rule of law and labor productivity growth by businesses within an EU country sample over the period 1998–2005. It finds that the rule of law affects labor productivity growth (LPG) by businesses within the EU via two distinct channels. First, the rule of law positively affects labor productivity growth by stimulating total factor productivity (TFP) growth. Second, the rule of law positively influences business investments in intangible capital. The author concludes that the rule of law is beneficial in facilitating an economy’s transformation towards becoming a knowledge economy.