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.

This could explain why the total

Dew-Becker 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.