human capital associated with training and education. This is referred to as a factor
productivity externality. A side effect of increased factor productivity is that, in the
restricted context of fixed output, labour is shed. The prospect of such “jobless
growth” is particularly serious in economies where the recorded rate of
unemployment as well as the rate of hidden unemployment is already high. Thus, the
factor productivity externality is a two edged process: industry and market services
become more productive and competitive, but labour demand is weakened if output is
fixed. However, on the plus side, factor productivity is driven up, real incomes rise,
and these effects cause knock-on multiplier and other benefits throughout the
economy. Thus, the role of the output externality is more unambiguously beneficial:
the higher it is, the faster the period of transitional growth to a higher income plateau.
The elasticities, particularly in relation to infrastructure, have been chosen on the
basis of an exhaustive literature review (see Bradley, Morgenroth and Untiedt, 2001
for details). The empirical literature suggests that the values for the elasticity of
output with respect to increases in infrastructure are likely to be in the region between
5 and 40 per cent, with small regions at the lower end of the scale. With respect to
human capital, elasticities in the same range also appear reasonable. However, since
such elasticities do not exist for many regions and some countries, those for more
advanced economies sometimes have to be utilised. However, sensitivity analysis has
been carried out and is discussed later. The infrastructure deficit in Objective 1
regions is often quite large relative to the more developed regions of the EU. Given
this and the fact that there are substantial returns to the elimination of bottlenecks,
which will take some time to accomplish, it is reasonable to expect that the chosen
elasticities will capture the benefits properly over the time period for which the
simulations have been carried out. For the same reasons it is unlikely that
diminishing returns will set in.
4. Impacts of Structural Funds
The HERMIN framework has been used extensively for Structural Funds analysis,
covering both ex-ante and ex-post evaluations. Here the process of carrying out such
an evaluation is outlined for the ex-post evaluation of over the programming period
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