Productivity Growth in Europe and the Us

8/14/2019 Productivity Growth in Europe and the Us

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PRODUCTIVITYGROWTH IN EUROPE

AND THE US

Presentation on the basis of article:

Charles Wyplosz

Productivity growthin Europe and the US.

Saugirda KoktaitJolanta Kardokait

Malwina Orowska


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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.


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DefinitionsProductivity: the amonunt of goods and services

produced from each hour of workers time

Labor productivity: the quantity of output per timespent or numbers employed; could be measured in, forexample, U.S. dollars per hour

Standard of living: refers to the quality andquantity of goods and services available to people, and theway these goods and services are distributed within apopulation


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This presentation shows that the

European productivity slowdown

compared to the United States.


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


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The gap has never really been narrowed,

it has in fact increased. The first increase

came in 1991 as a result of Germanunification. More worrisome is the gradual

widening since the mid-1990s.


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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.


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Labor productivity in the US accelerated from

1.3 percent in the 1973-1995 to2.2 percent in the 1995-2000.

1.3

2.2


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Labor productivity in the EU declined from anannual rate of2.4 percent during the period19731995 to 1.5 percent during the period19952000.

2.4

1.5


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Labour productivity

Europe has restored prosperity by

gradually raising its production

capacities.

The mission was successfully

accomplished by the mid-1990s.


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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.


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Figure 2 presents the changes in labor

productivity in the EU and the US.


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The catch-uphypothesis doesnot explain thereversal inproductivitytrends in Europeand US.

The reason forthis new, positivedevelopment arenot yet fullyelucidaded.

Figure 3 indicates that the decline of hours

per employee has slowed in Europe, just itfell in the US after a long period of stability.


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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 reducedlabor taxes and reformed theirlabor markets.

This could explain why the totalnumber of hours worked hasincreased.

Dew-Becker


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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 lessskilled.


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Rising labor taxes and increasingly morerestrictive 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.


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Picture shows the sources

of productivity growth


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Three sources of

productivity growthThere are two fundamental sources of

growth:technology advances

capital accumulation

Technology is a very important thing in ourlife and do not matter what you do you haveto use technology.

Capital accumulation its mean moreproductive equipment some of which is alsoproductive thanks to technological progress.


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While the two fundamental sources of growth

played a major and well documented role inEuropes fast labor productivity increase, there isa third source of growth.

Rising labor costs force firms to rice labor costs.The labor force is the sum of those employed andthose unemployed people.

Firms accumulate capital faster, in effectreplacing costly workers with relatively cheapermachines, and they replace unskilled with skilledworkers whose are individually more productive.


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The table shows productivity and real wages

in 1981-2008


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A more microeconomic story?

Explosive growth of investment in ICT (information

and communication technology) was at the centre

of the unrealistic expectations and excessiveenthusiasm 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.


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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


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Optimism?

Europes 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.


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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.


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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.


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What role for the ECB?

Edmund Strother Phelps, Jr. (born

July 26, 1933) is an American

economist and the winner of the 2006Nobel Memorial Prize in Economic

Sciences. The key finding is that the

long-run rate of unemployment is notaffected by inflation but only

determined by the functioning of the

labor market.


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Forty years intensive research confirmed this

discovery

Stabilization policy can only dampen short-termfluctuations in unemployment.

Phelps showed how the possibilities ofstabilization policy in the future depend ontoday's policy decisions.

Nowadays all central banks are required todeliver low inflation and to eschew any attemptat dealing with unemployment in particular, andgrowth or productivity more generally.


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The implication is clear:

Europes productivity performance is

unrelated to past and present

monetary policies and the ECB

should not be asked to deal with this

problem.

Productivity Growth in Europe and the Us

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