Arnold Kling  

The European Outlook

Greenspan's Concerns... Academic Lock-in...

Olivier Blanchard sees hope.

In the United States, over the period 1970 to 2000, GDP per hour increased by 38%. Hours per person also increased, by 26%, so GDP per person increased by 64%. In France, over the same period, GDP per hour increased by 83%. But hours per person decreased by 23%, so GDP per capita only increased by 60%. In that light, the performance of France (and of the European Union in general) does not look so bad: A much higher rate of growth of productivity than the U.S., and, as one might expect given that leisure is a normal good, the allocation of part of that increase to increased income, and part to increased leisure.

Another point that Blanchard makes is that most of the shortfall in hours worked in Europe comes from fewer hours per employed worker, rather than from reduced labor force participation or higher unemployment.

In some notes on the outlook for a cyclical recovery in Europe, however, Blanchard is cautious.

If we thought the Euro was going to further appreciate, the forecast would rapidly look worse.

He then goes on to point out that in fact the dollar indeed has to fall further in order to reduce the U.S. trade deficit.

As Blanchard points out in the first paper, his optimism depends on not reading too much into the productivity trends from 1995 onward. Those trends strongly favor the U.S. over Europe. My own inclination is to place a lot of weight on the recent rapid productivity growth in the United States, because I suspect that it is a sustainable result of our ability to put science and technology to use.

For Discussion. Why would high wages and expensive labor regulations tend to raise labor productivity in Europe?

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COMMENTS (6 to date)
Don Lloyd writes:

"Why would high wages and expensive labor regulations tend to raise labor productivity in Europe?"

It may or may not. But the enforced stability of the labor force will result in productivity being more sensitive to changes in demand.

Regards, Don

Ronnie Horesh writes:

"Why would high wages and expensive labor regulations tend to raise labor productivity in Europe?"

Because they make it too expensive to employ the least productive workers. [Presumably the higher European labour productivity is per employed worker.]

Robert Schwartz writes:

I got it teach, I got it. If labor is expensive and inflexible, managers will invest in fancy new machines in order increase production instead of hiring more employees. Result GDP per hour goes up 83% and unemployment stays at 10%

John Coyne writes:

Good discussion question, and i think the other commentators have hit the salient points. But while pondering it I had a "post hoc ergo propter hoc" moment - that is, do you think that a high productivity environment and the slack labor market - as a cause - could lead to more expensive labor regulations, heightened organized labor activity, and possibly higher wages - as a result - rather than vice versa? I am not suggesting that this was the case with Europe, but this may be the current situation in the US, what with a weak job market and presidential candidates (of both parties) waving the flag of protectionism and all.

Just a thought.

Randall Parker writes:

The problem with comparing productivity growth rates is that it is easier for a less productive economy to have its productivity grow at a faster rate. The less productive economy just has to play copycat. Whereas the more productive economy has to innovate. So a comparison between, say, France and the US from 1970 onward has to contend with the fact that improving productivity was easier for France due to the copycat effect.

The copycat effect could be done by copying industry practices, buying capital equipment, or by copying designs.

But if there are two economies that are of unequal productivity and the more productive one experiences more productivity growth than the less productive one that strikes me as a possible indicator that the less productive one's government is doing something wrong. But the problem could be caused by some other factors weighing against it (e.g. demographics).

As for the inflexible labor markets raising per hour productivity: It depends. If the inflexibility comes from raising lower end wages then, yes, that will raise productivity by keeping the less productive out of the labor force. But if the inflexibility makes it hard to fire the lazy then I'd expect the inflexibility to work in the opposite direction.

But there are other factors that need to be adjusted for. For instance, average age of the labor force will cause differences in productivity. Workers start out less efficient and become more efficient. They peak at different ages depending on what job they have and what abilities they have (smarter people can obviously learn more and progress more in productivity with age). Europe's demographic picture is much different because of age.

Immigration is another factor. The US is experiencing a very high level of immigration. The average educational level of Mexican immigrants is 8th grade. That lowers per-worker productivity. What is immigration doing to European productivity? What is the skill level of immigrants to Europe versus America?

Lawrance George Lux writes:

The effect of advanced technological investment by such may be countered by a loss of Consumer Demand, unless Wages are significantly high. Most labor regulations and Wages will not spur heavy capitalization because they do not raise Wages high enough. lgl

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