Productivity Growth In Europe And The Us

PRODUCTIVITY GROWTH IN EUROPE AND THE US Presentation on the basis of article: Charles Wyplosz “Productivity growth in Europe and the US”.

Saugirda Kokštaitė Jolanta Kardokaitė Malwina Orłowska

A comparison of the standard of living in Europe and the US shows that Europe has not caught up and is becoming more and more behind. Looking at the performance, 1960-90 Europe has caught up more than the US, but since the mid-1990s, lost ground.

Definitions Productivity:

the amonunt of goods and services produced from each hour of worker’s time

Labor productivity:

the quantity of output per time spent or numbers employed; could be measured in, for example, U.S. dollars per hour

Standard of living:

refers to the quality and quantity of goods and services available to people, and the way these goods and services are distributed within a population

This presentation shows that the European productivity slowdown compared to the United States.

Figure 1 illustrates the changes in GDP per capita in the EU15 and the US since 1960.

The gap has never really been narrowed, it has in fact increased. The first increase came in 1991 as a result of German unification. More worrisome is the gradual widening since the mid-1990s.

Slower labor productivity growth in Europe than in the United States since 1995 reverses a

long-term pattern

of convergence.

But yet, the traditional postwar convergence process came to an end by the mid-1970s. Then, in the period from 1973 to 1995, productivity growth in both Europe and the United States began to slow.

Labor productivity in the US accelerated from 1.3 percent in the 1973-1995 to 2.2 percent in the 1995-2000.

2.2 1.3

Labor productivity in the EU declined from an annual rate of 2.4 percent during the period 1973–1995 to 1.5 percent during the period 1995–2000.

2.4 1.5

Labour productivity Europe has restored prosperity by gradually raising its production capacities.

The mission was successfully accomplished by the mid-1990s.

Similarly the employment ratio has sharply risen in Europe while it has remained stable in the US. Thus the deterionation of European living standarts relatively to those in the US.

It is entirely due to the poor productivity performance in Europe while US productivity has accelerated as the right-hand side in figure 2 clearly shows.

Figure 2 presents the changes in labor productivity in the EU and the US.

Figure 3 indicates that the decline of hours per employee has slowed in Europe, just it fell in the US after a long period of stability.  The catch-up hypothesis does not explain the reversal in productivity trends in Europe and US.  The reason for this new, positive development are not yet fully elucidaded.

Dew-Becker and Gordon, the most recent and authoritative analysis of the question, argues that the most plausible explanation is that labor market conditions have improve in Europe. Indeed, since the mid-1990s, many countries have reduced labor taxes and reformed their labor markets.

Dew-Becker

This could explain why the total number of hours worked has increased.

According to Dew-Becker and Gordon, this more extensive of the workforce has mostly concerned previously not-working people, many of whom are low- skilled. On average, the overall workforce has become less skilled.

Rising labor taxes and increasingly more restrictive labor market arrangements during this period have forced firms to hire skilled workers.

This upgrading of the workforce has raised labor productivity in Europe but it is.

Picture shows the sources of productivity growth

Three sources of productivity growth There are two fundamental sources of growth: technology advances capital accumulation

Technology is a very important thing in our life and do not matter what you do you have to use technology. Capital accumulation it’s mean more productive equipment – some of which is also productive thanks to technological progress.

While the two fundamental sources of growth played a major and well documented role in Europe’s fast labor productivity increase, there is a third source of growth. Rising labor costs force firms to rice labor costs. The labor force is the sum of those employed and those unemployed people. Firms accumulate capital faster, in effect replacing costly workers with relatively cheaper machines, and they replace unskilled with skilled workers whose are individually more productive.

The table shows productivity and real wages in 1981-2008

A more microeconomic story? Explosive growth of investment in ICT (information and communication technology) was at the centre of the unrealistic expectations and excessive enthusiasm that surrounded the “new economy” during the late 1990s.

The slowdown in GDP growth and investment in ICT in the US since 2000 has tempered the hype.

With the recent boom in ICT investment, labor productivity growth in the U.S. more than doubled: from 1.1% in 1990-1995 to 2.5% in 1995-2000

In contrast labor productivity growth in most European countries slowed during the second half of the 1990s. from 1.9% in 1990-1995 to 1.4% in 1995-2000

Optimism? Europe’s famous underutilisation of its labor resources - and therefore its high unemployment rate - is now being cured.

Currently, we see a slowdown in productivity gains because more low-skilled workers find jobs.

As firm adapt to this change and invest in equipment that makes better use of these workers.

 It takes several years for capital to accumulate but the process is most likely under way.

In addition, a more intensive use of previously idle labor means that the same productivity gains translate into a faster rise in living standards. When it happens, Europe will be catching up again.

What role for the ECB? Edmund Strother Phelps, Jr. (born July 26, 1933) is an American economist and the winner of the 2006 Nobel Memorial Prize in Economic Sciences. The key finding is that “the long-run rate of unemployment is not affected by inflation but only determined by the functioning of the labor market”.

Forty years intensive research confirmed this discovery… Stabilization policy can only dampen short-term fluctuations in unemployment. Phelps showed how the possibilities of stabilization policy in the future depend on today's policy decisions. Nowadays all central banks are required to deliver low inflation and to eschew any attempt at dealing with unemployment in particular, and growth or productivity more generally.

The implication is clear: Europe’s productivity performance is unrelated to past and present monetary policies and the ECB should not be asked to deal with this problem.