Productivity, income growth slower in the euro zone than the United States

Frankfurter Allgemeine Zeitung ^ | Aug. 20 2004 | Patrick Welter

[Jordi]

The U.S. economy slowed in the second quarter. Annualized growth is 3 percent, that is still considerably higher than the growth rate for the euro zone, where gross domestic product increased by no more than 2-2.4 percent in the second quarter. A quick glance at these quarterly figures may buttress a prevalent stereotype: that Europe lags far behind the United States. But on closer examination, the economic situation in the euro zone is not as bad as these numbers might indicate.

In particular, Europeans generally enjoy more free time and are prepared to forgo extra income in return. But productivity growth is lower in Europe than on the other side of the big pond.

From 1990 to 2003, the U.S. economy grew by an average 2.9 percent a year, compared with annual growth of 1.9 percent for the euro zone. The United States thus holds a sustained 1 percentage point lead over the euro zone. One reason for the United States' relatively strong growth rate is the increase in the U.S. population. Thanks also to high immigration flows, the U.S. population grew by 1.2 percent in the 10 years up to 2003, compared to just 0.5 percent in the euro zone. More people mean more growth, but not necessarily greater wealth.

This is measured best in terms of per capita income. The average per capita income in the United States grew by 2.1 percent between 1993 and 2003, according to the European Central Bank, compared to 1.7 percent for the euro zone. If problem case Germany is factored out, per capita income in the euro zone increased equally fast as in the United States during that period.

Experts doubt, however, that the euro zone would have managed equally well to turn this sort of population growth into economic growth. “The Americans can integrate new people into the labor market because the market is more flexible,“ said Ulrich Kater, chief economist at Dekabank.

In any case, a simple comparison of per capita income does not adequately reflect reality. People can earn a lot because they work a lot or because they work productively. And the ECB study shows that the euro zone and the U.S. economy have developed very differently in this respect.

Hourly productivity growth in the euro zone reached 2.3 percent during the 1980s, compared to just 1.6 percent for the Americans. At the same time, the average European spent about 0.4 percent less time on his job during that period, while average working hours increased by 1 percent in the United States.

The Europeans lost their productivity lead in the 1990s. Average hourly productivity growth in the euro zone slowed to about 1.4 percent, putting the Europeans roughly on a par with their U.S. peers. Europeans also spent 0.3 percent more time on the job during that decade, while the average American work week increased by 0.7 percent.

This comparison casts doubt on the commonplace assumption that high pay increases stifle productivity in Europe, pushing the factor of labor out of the production process. From 1996 to 2003, employment in the euro zone grew by about 9.1 percent, compared to a 7.5 percent increase for the United States. Employment in relation to the total population increased by 0.8 percent in the euro zone and by 0.1 percent in the United States. At the same time, however, the productivity gap between the two economic areas started to open up - to the benefit of the United States.

Productivity growth started to increase in the United States and decrease in the euro zone. This is not necessarily a bad thing for Europe. A study by the International Monetary Fund showed that lower wage increases in the euro zone caused companies to use more labor rather than capital. Slower productivity growth is the price the Europeans paid for more labor-intensive production. In addition, various efforts have been launched to render the euro-zone job market more flexible.

Unlike the euro zone and despite strong employment growth, the Americans have managed to stem the downward pressure on labor productivity in recent years. The U.S. economy's total productivity has been on the rise, above all because of rapid productivity gains in high-technology sectors and among service providers. Both segments are bigger in the United States than in the euro zone.

But catching up with the United States will be a tough task. Average per capita income in Europe currently amounts to just 70 percent of the U.S. equivalent. This gap could narrow if Europeans were prepared to work longer hours. Annual working hours per employed person in the euro zone have fallen to about 1,500 hours a year over the past few decades, while Americans work more than 1,850 hours a year.

The Europeans' lower average income is thus above all the result of shorter working hours, and not of lower labor productivity. The Europeans have been nearly as productive as the Americans over the past few years, but have enjoyed more free time and forgone higher incomes. Economists are divided on whether this behavior is voluntary or forced.

Edward Prescott of the Federal Reserve Bank of Minneapolis argues that high income taxes in western Europe entice people to switch to free time - or illegal employment. Harvard University's Olivier Blanchard counters that the Irish are working less and less despite the country's low marginal income taxation.

[y2k_free_radical]

ping

[Tribune7]

If problem case Germany is factored out, per capita income in the euro zone increased equally fast as in the United States during that period.

Gee, how 'bout we factor out the immigrants. You can't have it all ways.

[Malesherbes]

Same old reason - Europeans prefer more leasure time (i.e. Americans work harder.)