Arnold Kling  

European Productivity

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The Economic Policy Institute, a left-wing think tank (well, the newspapers always refer to Cato and Heritage as right-wing think tanks, don't they?), writes,


seven OECD countries have passed the U.S. in productivity: Norway, with 131 percent of U.S. productivity levels; Belgium, 11 percent; Netherlands, 106 percent; Italy, 105 percent; France and Ireland, 103 percent; and Germany, 101 percent. The ability of these countries to surpass U.S. productivity in 2002 suggests that their comprehensive welfare and collective-bargaining systems have not stymied income growth or improvements in economic efficiency relative to the more free-market-oriented U.S.

Actually, it suggests no such thing. As Brad DeLong once pointed out to me in an email, you would expect hourly productivity (which the EPI is using) to be higher in Europe than the U.S., because of all the cost-increasing labor market restrictions there. Any business anywhere will avoid hiring workers beyond the point where productivity fails to match costs. The European productivity data simply illustrate basic economic behavior.

Bruce Bartlett, who the newspapers might refer to as a right-wing think tank, writes,


A new report from the Bureau of Labor Statistics shows the United States with real gross domestic product per person in 2003 of $34,960 (in 1999 dollars). This is well above every European country. The most productive European country, Norway, has a per capita GDP of just $30,882 (converted using purchasing power parity exchange rates). The major countries of Europe are even further behind: United Kingdom ($26,039), France ($25,578), Italy ($24,894) and Germany ($24,813).

In other words, Europeans produce no more per year than Americans did 20 years ago.


What Bartlett is quoting are statistics on annual productivity. The reason that the U.S. comes out so much higher on annual productivity than hourly productivity is that U.S. workers work more hours. The question then arises as to how to value the additional leisure time of European workers. If it is all voluntary, then the higher annual productivity figures are completely misleading, and the Europeans in fact are doing well.

Bartlett questions how much the Europeans are enjoying their leisure.


One reason for the short workday is that Europeans seem to get sick a lot more than Americans. According to a July 25 report in The New York Times, on an average day 25 percent of Norway's workers call in sick. A 2002 study in Sweden found that the average worker there took more than 30 sick days per year. Makes you wonder just how good their health care systems really are.

Bartlett cites work by Edward Prescott showing that high taxes are a significant factor in leading Europeans to put in less time in market activity.

Don Boudreaux writes,


Differences in marginal tax rates is one that [op-ed writer Niall] Ferguson mentions, along with government-enforced restrictions on the maximum number of hours anyone can work per week. Also mentioned is the fact that American employers can – compared to their European counterparts – much more easily fire lazy employees.

These reasons strike me as pretty sound explanations for why the average German worker works 22% fewer hours per year than does the average American worker, and the average French worker toils 32% fewer hours.

But Ferguson ends his op-ed curiously: despite these strong explanations mentioned earlier in his op-ed, he concludes that the likely explanation for this difference in work patterns is the fact that more Americans than Europeans attend church. Apart from an allusion to Max Weber’s protestant-ethic thesis, Ferguson offers no further justification for identifying Americans’ greater church attendance as a reason why Americans work more than Europeans.

Curious.


Perhaps the connection is that the religion-reinforced work ethic in America is reflected in a tax code that is relatively less punitive of labor than that in Europe.

UPDATE: Stephen Kirchner led me to an article by Robert Gordon.


Europeans worked longer hours than Americans during the 1945-73 era of postwar reconstruction, so their passion for long vacations and short weekly hours of work is a recently acquired taste.

...gap between a Europe/U. S. ratio of 93 percent for [hourly] productivity and 77 percent for [annual] output per capita, I would make a wild guess that about one-third of the difference represents voluntarily chosen leisure and the remaining two-thirds represents a lack of employment opportunities. This would imply that the "welfare-corrected" ratio in the year 2000 is neither 77 nor 93 percent, but something closer to 85 percent.

For Discussion. What evidence is consistent with the view that the labor-leisure choice is adversely distorted in Europe, and what evidence suggests otherwise?


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TRACKBACKS (12 to date)
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The author at Different Opinion in a related article titled Enjoying Leisure writes:
    ...We've converged upon log-utility and rational choice as the explanation for the observed variations in leisure ...Why not use this ... to measure how much utility the European welfare-state gains when it transfers wealth [among] households!? ...it i... [Tracked on August 18, 2004 4:53 PM]
The author at Tim Worstall in a related article titled Pick of Carnival of the Capitalists. writes:
    Arnold Kling provides the cream of the crop in this weeks Carnival of the Capitalists at Mobile Technology. All of the others are well worth reading of course yet I'm drawn to the Professor's work precisely because he is talking about a vital point, di... [Tracked on August 23, 2004 4:25 AM]
The author at The Mobile Technology Weblog in a related article titled Carnival of the Capitalists writes:
    Welcome to this week's Carnival of the Capitalists, which I have the privilege of hosting this week. We have a few less entries than normal, but I haven't taken it too personally. Doubtless the holiday season has played its... [Tracked on August 23, 2004 2:56 PM]
The author at Blogcritics in a related article titled Carnival of the Capitalists writes:
    Welcome to this week's Carnival of the Capitalists, which I have the privilege of hosting this week. We have a... [Tracked on August 24, 2004 8:21 AM]
COMMENTS (10 to date)
Bernard Yomtov writes:

Adversely distorted with respect to what? Why can't the labor/leisure trade-off in Europe simply be different than that in the US without either one being "distorted?"

John Thacker writes:

Bernard-- "Adversely distorted" merely meaning that government regulation and other intervention results in people changing their behavior and, on the whole, achieving less utility than they would otherwise.

Prof. Kling quite clearly in his "For Discussion" leaves open the possibility that distortion is not occurring.

Michael Messina writes:

As I was skimming through the EPI chapter linked to in the press release, I couldn't help but wonder: why is Norway so productive (31% more productive than the US)? Their unemployment is low (3.9% 2002), so I don't see how labor laws, as you alluded to, can have much effect.

However, there is one interesting thing about the Norwegian economy: oil. According to this article (I can't find official statistics), the oil industry accounts for about 20% of their GDP and employs only about 25,000 people (total population 4.3 million). Even if these people worked 100% of the time, the nation's productivity ($ GDP/hour worked) would be high, since they are such a small percentage of the population and produce a significant amount of GDP (assuming everyone else is not extremely unproductive). It would also mean that when oil prices increase, their productivity would increase accordingly.

I am not sure any other country in the EPI article has such a situation. Regardless, this at least shows that comparing aggregate productivity numbers across nations can be problematic, particularly when you are talking about countries with differing economic focus. For Norway, it is natural resources (and the fact that it is relatively small compared to the value of those resources). For the Netherlands, maybe it is the fact that it is heavily into foreign trading. For the other countries, maybe it is labor laws. It seems that to make valid comparisons, you need to compare sectors (e.g. "manufacturing", maybe even more specific). Record the output, count the hours, divide, and then compare. Aggregation gets rid of too much information.

Bernard Yomtov writes:

John,

Yes, I understood that he was not suggesting there necessarily is a distortion.

But I still maintain that the question is impossible to answer without a reference point, and I don't think the one you suggest works. We have no sensible way to determine what choices people would make in the absence of government. Maybe they would spend a lot more on firearms, armored cars, bodyguards and the like. We have no way to measure the utility provided by government.

Most important, I think it is wrong to assume that government programs and "interventions" necessarily reduce utility. The economic structure of a democracy is not imposed by malevolent outsiders. It is chosen through a political process. Why the idea that these must be utility-reducing choices?

Gary writes:

"The Economic Policy Institute, a left-wing think tank (well, the newspapers always refer to Cato and Heritage as right-wing think tanks, don't they?), "
Remember Cato and Heritage describe themselves as right-wing or conservative. EPI does not declare a political wing anywhere in its descriptions and if fact refer to themselves "nonprofit, nonpartisan think tank that seeks to broaden the public debate about strategies to achieve a prosperous and fair economy." So I guess that remark is not really fair.

Scott Nesbitt writes:

Gary,

I do not think Cato calls itself either conservative or right-wing. At the below link, under "How to Label Cato" it discusses this:

http://www.cato.org/about/about.html

Scott Nesbitt

Sandy P writes:

--"nonprofit, nonpartisan think tank that seeks to broaden the public debate about strategies to achieve a prosperous and fair economy."---

Fair economy????

Oh, yeah, that's a conservative thinktank.

Mattew writes:

In prehistoric times there were no taxcollectors, so perhaps the hunter-gatherer is a nice reference point.

Professor Sharon Beder, ('Working Long Hours', Engineers Australia, March 2001, p. 42) writes:

According to anthropologists, hunter-gatherer societies were able to meet their needs and enjoy an adequate diet with 20-35 hours work per week. Peasants doing agricultural work in medieval times, worked according to growth cycles and seasons and were thought to have worked perhaps 120-150 days in a year, although some of these days would have been long.

Even lazier than modern Europeans... Perhaps it is the Americans that have a distorted work-ethic. (read:

(Granted, the marginal product of labor was very low in those days. But if one assumes that the substitution and income effects cancel out, the situations are still comparable). Or am I wrong?

Mattew

BatmanG8 writes:
Any business anywhere will avoid hiring workers beyond the point where productivity fails to match costs.

In economics according to Jerry Maguire & Rod Tidwell, this is known as the need for the marginal employee to "materialize the coin". "Coin" is pronounced in French fashion, "quan", since it represents the quantum of value that must be produced for employment to be sustainable.

Government action can greatly affect the level of "the coin" that must be materialized. Minimum wage laws increase it, as do employment taxes (e.g. socialist insecurity, workers' compensation "insurance", unemployment "insurance"), various regulations, other taxes...

And that leads one to interest in measuring and comparing "the coin" among different states within the United States and different countries.

Of course, from the employee's POV, the most important issue between economic depressions is getting the seemingly recalcitrant employer to, "Show me the money." when he is far more productive than "the coin", and the executives are raking in huge cash and option while seeming to fail to "materialize the coin", themselves.

BatmanG8 writes:
"The Economic Policy Institute, a left-wing think tank (well, the newspapers always refer to Cato and Heritage as right-wing think tanks, don't they?), " Remember Cato and Heritage describe themselves as right-wing or conservative. EPI does not declare a political wing anywhere in its descriptions and if fact refer to themselves "nonprofit, nonpartisan think tank that seeks to broaden the public debate about strategies to achieve a prosperous and fair economy".

Agreed that EPI is weaselly about their leanings. Based on their press releases and posted material I'd say EPI is left-wing, Heritage conservative, and Cato seems to be about 75% right-wing and 25% libertarian these days (having shifted more right-wing over time).

But it is important to look at what everyone is saying in their reports and such. What is high-lighted in this article is that there is no perfect economic data, and certainly none on this topic. Each think tank chooses which data to use, based on which data they have developed on their own, which they can easily access, and how they were thinking about the issue at the time. Each kind of data is better for some kinds of analysis than it is for others. And the best we can do is look at and weigh all of it in as informed a manner as possible.

Of course, when a news-paper chain features a snippet of such data in a small but fancy graphic titled "BizFact: Ahead of Uncle Sam", they don't encourage many of their readers to look any further but to accept what is shown to guide their thinking about public policy.

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