Demand- and Supply-Driven Externalities in OECD Countries: A Dynamic Panel Approach

This paper provides empirical evidence of the relevance of supply- and demand-driven externalities in determining sectoral employment growth for 18 industrial sectors on a set of OECD countries. The paper improves over the existing literature in two ways. First, we use dynamic panel estimation technique. This allows us to utilise lagged variables as natural instruments and to take account of possible dynamic externalities. Second, we look for evidence of externalities by relating activity in sector i to a weighted sums of downstream and upstream activity - thanks to input-output tables. This allows us to distinguish between demand- and supply-driven externalities.