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Wednesday, January 25, 2006

Why is U.S. Productivity Strong Relative to Europe?

Hal Varian argues that a primary factor in explaining the U.S. productivity advantage in recent years is more effective use of information technology. Chris Giles of the Financial Times follows up with a discussion of this and other influences on the difference between the U.S. and European productivity rates. He says resistance to change and tougher management practices has forestalled the adoption of productivity enhancing technology:

How US productivity pulled away, by Chris Giles, Financial Times: You could call it the productivity myth. It goes like this. European economies trail behind the US because their citizens would rather people-gaze from a pavement cafe than labour loyally in the corporate salt mines. Americans, on the other hand, are a bunch of stakhanovites so preoccupied with boosting their nation’s gross domestic product they take just a week’s vacation a year.

The conveniently simple notion that Europeans are poorer because they prefer leisure to work can no longer be supported by the data, however. ... One fact is indisputable. Over the past decade the US has stolen a march on its competitors so marked that it can no longer be dismissed as a statistical blip. ... The trend had been obvious for some time before that. ... The US has not always held so unassailable a lead. In the 1950s and 1960s, European per capita incomes steadily rose towards US levels, spurred on by the rapid recovery from the devastation of the second world war and the successful integration of European economies. ...


But the good times in Europe and Japan are long gone. In the past decade, the gap between US living standards and those in other leading countries widened again. ... the relative position of Europe’s economy has declined since 2000.

For much of that period, economists have grasped at sociological and cultural straws as they sought to explain the continued disparity in living standards. They have argued it had much to do with Europeans’ determination not to work themselves into the ground like their unfortunate US counterparts. Part of this is true. Europeans do work fewer hours than US employees... Most of this difference is indeed a conscious choice. The decline in European weekly working hours has been a consistent feature since 1950. In the US, in contrast, hours worked stopped falling in the early 1980s and since then, while US citizens have become richer, they have not chosen to “buy” additional leisure time.


Europeans accept that lower incomes are the price of spending more time at home. If they worked US hours, ... European GDP per capita would increase from 73 per cent of US levels to 86 per cent. ... A second drag on European living standards is the share of its population that is working. Unemployment dogs Germany, France and Italy ... because European economies are worse at getting the young into employment and keeping older people at work. For the 30 to 50 age group, there is almost no difference between the participation rates of the US and Europe...

The Conference Board, the global business organisation, has found that the differences between the two can be found in just three industries: retail, wholesale and finance. Take retail, where research ... indicated that the US’s advantage is almost entirely due to the building of new shops and the closure of existing stores that had become uncompetitive. The Wal-Mart effect, in other words, transformed the US economy as much as it transformed the US landscape.

By contrast, in Europe planning laws and a reluctance to allow old establishments to fail have prevented productivity growth from taking off. Prof Robert Gordon of Northwestern University thinks the outcome reflects the power of existing producers in Europe at the expense of poorer consumers. This, he believes, is a high price for Europeans to pay for the preservation of small and unproductive shops. The idea that European economies are bad at exploiting new technology is supported by detailed research ... Management differences and the use of technology explains Europe’s poor performance... US companies use technology better and their hire-and-fire culture keeps workers on their toes.

If Europe wants to improve its productivity levels, it seems, it must accept tougher management, the emergence of new and much more productive shopping centres and the death of many companies. The same lessons apply to Japan. For the US, the lesson of the past decade is that it should avoid complacency ... If Europe were to rediscover its competitive spirit and close the gap, it could disappear as quickly as it came...

    Posted by on Wednesday, January 25, 2006 at 12:33 AM in Economics, Technology | Permalink  TrackBack (1)  Comments (21)


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