High productivity workplaces - the European model
The revival of the 'euro-sclerosis' thesis has been sustained by the apparent 'productivity' miracle of the United States in the second half of the 1990s. Regulation is blamed not only for high unemployment but also the alleged failure of Europe to benefit from a US-model 'new economy'.
In 1998 two economists at the DTI published a study showing that Germany and France had not only eliminated the substantial US historic lead in workplace productivity (GDP per hour) but also in the 1990s pulled ahead. They concluded that France and Germany were assuming the role of productivity leaders within the OECD and that ' one implication for policy is that we should increasingly be looking to France and Germany for best practice on how to utilise labour that is in work. The US is no longer the productivity leader as commonly assumed' (Harley and Owen, Economic Trends, January1998). But only a few years later, a Treasury analysis suggested time were changing: 'after a lengthy period of post war catch-up, the productivity gap with the US has once again begun to widen. The EU needs to intensify its efforts simply to hold its ground.' (Realising Europe’s Potential, HMT 2002).
However, the latest estimates from Eurostat suggest the DTI conclusion is still valid. Between 1992 and 2002 the US lost ground against most European economies in terms of GDP per hour - the best measure of productivity in the workplace. By 2002 eight of the 15 EU economies (Luxembourg, Belgium, Italy, Netherlands, France, Ireland, Denmark, Germany) had higher workplace productivity (GDP per hour) than the US. These figures are not however adjusted for the effects of the economic cycle, so the apparent fall in US productivity levels in the early 1990s is almost certainly exaggerated. But equally, these figures do not suggest the US securing a decisive lead over Europe either.
WORKPLACE PRODUCTIVITY COMPARED 1992-2002
|
EU15 =100 |
GDP per hour worked (index) | ||
|
1992 |
1997 |
2002 | |
|
Luxembourg |
169.3 |
178.4 |
181.4 |
|
Belgium |
124.0 |
126.3 |
124.2 |
|
Italy |
113.3 |
111.9 |
113.8 |
|
Netherlands |
112.4 |
115.1 |
113.1 |
|
France |
118.2 |
110.8 |
113.7 |
|
Ireland |
91.8 |
102.5 |
110.6 |
|
Denmark |
100.0 |
106.9 |
107.3 |
|
Germany |
102.9 |
107.3 |
106.2 |
|
United States |
113.9 |
104.2 |
105.0 |
|
Austria |
97.4 |
96.8 |
102.7 |
|
Finland |
80.8 |
91.5 |
95.6 |
|
Sweden |
91.9 |
97.9 |
93.8 |
|
UK |
89.0 |
88.2 |
88.1 |
|
Spain |
86.0 |
83.6 |
80.4 |
|
Greece |
62.8 |
64.8 |
70.2 |
|
Portugal |
55.2 |
62.0 |
60.7 |
|
Eurozone |
102.7 |
103.5 |
102.9 |
Note: GDP per hour worked in purchasing power parities, EU15 =100. Non-Eurozone economies are Denmark, Sweden and the UK
Source: EU Structural Indicators, Eurostat January 2003.
As a recent review of the evidence by the European Central Bank (ECB) concluded once hours are taken into account 'the much debated difference in productivity growth in the second half of the 1990s was less pronounced than is generally assumed (ECB August 2002 Bulletin, pp 29-31). Over the past decade annual hours worked have fallen in most European economies due to working time reductions and a bigger share of those in employment working part time. Part time work as a share of total employment has gone up in Europe and down in the United States. Compared with the US, annual hours worked per person were 20 per cent lower in Germany, 16 per cent lower in France, 11 per cent lower in Italy and 7 per cent lower in the UK in 2001 (OECD Employment Outlook 2002).
The ECB also noted, 'in the second half of the 1990s the cyclical expansion experienced in the United States was stronger than that in the euro area, thus creating a bias in relative productivity developments of the United States'. OECD economists have even more recently published estimates showing that the remaining differences between EU15 and US labour productivity growth rates disappear once allowance is made for the economic cycle. Against the other major OECD economies, cyclically adjusted productivity growth rates between 1996 and 2000 were similar in the US, Germany, Italy and Canada. France continued to outperform the US, while the UK lagged slightly behind the rest (OECD Economic Working Paper 2003(1), table 1, p 7).
The jury is still out both on the sustainability of the recent US productivity spurt but we are not yet persuaded that the current technology burst has created a 'new economy' in the US that now demands the abandonment of the European social model. Our current view is that the US productivity spurt has been driven mainly by very high productivity growth in a limited number of high tech industries with more limited impacts on the rest of the economy. If the prime driver behind sustained faster productivity growth in the US is new technology we would expect European economies using very similar technologies to also receive a similar boost to productivity growth over time.
Some have nonetheless suggested that business and labour market regulation in Europe puts Europe at a permanent disadvantage to the US in adapting to the latest new technologies, particularly in high tech industries. We find the evidence to support this view so far unpersuasive. Had product or labour market regulation been a key influence on workplace productivity growth, it is hard to see how the European economies were ever able to catch up the United States let alone sustain that lead in recent years. Moreover, most European economies have deregulated and liberalised significantly since 1979, with the UK leading the way. This has not lead to an improvement in productivity growth in most European economies, including the UK.
The ECB has more reasonably suggested one reason for the underlying productivity slow down in the Eurozone in the second half of the 1990s was that European labour markets were more successful than in the past in bringing less skilled and inexperienced workers into the labour force. The Treasury has also suggested this was a factor behind slower productivity growth in the UK. If true, this can only be a temporary rather than a permanent effect - provided efforts are made to raise the average productivity of unskilled and inexperienced workers through investment in skills and education.
It is quite remarkable how so many conclusions have been reached on the basis of a few years of faster productivity growth in the US and slower growth in Europe. Our assessment is that once allowance has been made for changes in hours worked and the economic cycle there has been a convergence between productivity growth rates in the US and Europe in the second half of the 1990s. The idea that the US has undergone a fundamental change and will surge ahead of European economies strangled by regulation is far-fetched.
The UK has been the European test-bed for the economic benefits of deregulation, but signs of a 'new economy' boost to productivity growth in the UK are completely absent. If it has not worked in the UK, why should it work in other European economies? This suggests other factors are far more important - including the sheer size of the American information and communication technology (ICT) sector and the dominance of US corporations in the global high tech industries. Moreover, US corporate giants such as Walmart are able to exploit economies of scale offered by the huge and unified US domestic market through investment in new technologies in more traditional sectors such as retail. These technological challenges to Europe will not be met dismantling the European social model.
Productivity, employment and labour market regulation
Country |
Productivity (GDP per hour worked 2002) (i) |
Employment Rate %(2001) (ii) |
Strength of employment protection legislation (late 1990s) (iii) |
|
USA |
105.0 |
75.0 |
0.7 |
|
Belgium |
124.2 |
59.9 |
2.5 |
|
Denmark |
107.3 |
76.2 |
1.5 |
|
Germany |
106.2 |
65.4 (2000) |
2.6 |
|
Greece |
70.2 |
55.4 |
3.5 |
|
Spain |
80.4 |
57.7 |
3.1 |
|
France |
113.7 |
62.8 |
2.8 |
|
Ireland |
110.6 |
65.7 |
1.1 |
|
Italy |
113.8 |
54.9 |
3.4 |
|
Luxembourg |
181.4 |
62.7 (2000) |
N/A |
|
Netherlands |
113.1 |
74.1 |
2.2 |
|
Austria |
102.7 |
68.4 |
2.3 |
|
Portugal |
60.7 |
68.7 |
3.7 |
|
Finland |
95.6 |
68.2 |
2.1 |
|
Sweden |
93.8 |
74.1 |
2.6 |
|
UK |
88.1 |
71.8 |
0.9 |
(i) Source: Eurostat, OECD, EU 15= 100
(ii) Source: Eurostat
(iii) Source: OECD, 1999. The index runs from 0=weakest to 5=strongest form of employment protection legislation
The table above summarises the data on productivity, employment performance and the strictness of labour market regulation. While the UK does well on employment it performs much less well on productivity - despite having a lightly regulated labour market. If the CBI case were correct then countries like Denmark, the Netherlands and Sweden all ought to be in a parlous economic condition - with their employers rushing to shift production to India, China or Brazil at the earliest possible opportunity. Yet, despite the fact that the Netherlands, Denmark and Sweden all have strong unions, widespread coverage of collective agreements and higher level of labour market regulation than the UK they also have higher productivity and a higher employment rate. The notion that there is a linear relationship between the extent of labour market regulation and economic performance is wholly false.
Explanations for differences between countries must therefore be sought elsewhere - principally in monetary and fiscal policy. Put simply, macro policy matters more than micro level interventions in the labour market and employers’ organisations would be well advised to direct their focus of attention here rather than pursue a tendentious argument about red tape.