U.S. vs. European Productivity: Archive Entry From Brad DeLong's Webjournal

November 15, 2002

U.S. vs. European Productivity

The Economist considers the gap in productivity growth between the United States and western Europe. In my view, it gets itself somewhat confused about just what the right apples-to-apples productivity growth comparison should be.

I want to, but don't have time to, lay out my view on what the "right" apples-to-apples comparison is. So I need to FLAG THIS FOR LATER...

Economist.com: ... There are many ways to measure productivity. America has chosen the most flattering one, the euro area the least flattering. American official statistics use output per man-hour in the non-farm business sector. Growth in this averaged 2.3% a year in the five years to 2001. By contrast, the productivity figures that the ECB publishes for the euro area use GDP per worker in the whole economy. Growth of this has averaged less than 1% over the past five years. Unlike America's, this measure includes the public sector, which tends to have slower productivity growth. By taking output per worker rather than output per hour, it also ignores the fact that average hours worked have fallen as part-time jobs have risen, depressing average output per worker.
If one calculates GDP per man-hour for both economies, labour-productivity growth in the past five years has averaged 2.2% in the United States, against 1.4% in the euro area. America still leads, but by a narrower margin. Yet even these figures are comparing apples with oranges. One important difference is the treatment of computer software. American statisticians count firms' spending on software as investment, so it contributes to final GDP. In the euro area, software is instead largely counted as a current expense, and so is excluded from final output. The surge in spending on software in the late 1990s therefore inflated America's growth rate relative to Europe's.
François Lequiller*, at INSEE, France's statistical office, argues that one way to resolve this problem, at least in part, is to use net domestic product (NDP), which deducts capital depreciation, rather than gross domestic product. Normally GDP and NDP grow at roughly the same pace. But in recent years a significant gap has opened up between the two in America, as the rate of capital depreciation has risen sharply thanks to a surge in investment in computers and software, which have much shorter lives than traditional machinery. Europe's investment in software, as officially measured, is much lower, so the difference between GDP and NDP growth in recent years has been negligible. Julian Callow at CSFB calculates that in the five years to 2001 productivity, measured by NDP per hour, rose by 1.8% a year in America and by 1.4% in the euro area—a much narrower gap.
Whichever figures one uses, though, labour-productivity growth has risen over the past decade in America, but fallen in Europe... One reason is that American firms invested more heavily in IT equipment than European firms in the 1990s, boosting the capital stock per worker. This is why many economists prefer to focus on multifactor productivity, the increase in the efficiency with which firms use both capital and labour. But that is even harder to compare sensibly across countries.

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Posted by DeLong at November 15, 2002 02:32 PM | Trackback

Well, historically in the post-WW2 era, U.S. productivity growth has been significantly below Europe's (with the exception of the U.K.). The general explanation for this is that Europe has been catching up from the lower base and destruction of WW2. Maybe by now, Europe's economies are technologically all up to the latest standards, so from now on -- with periodic fluctions with an occassional late-90s style decade with faster American productivity growth and an occassional early-90s with faster European productivity growth -- the differences between the European and U.S. economies will stay about where they are, with productivity growth in both economies staying about the same, with the remaining gap staying around due to work effort, labor force participation, institutions, etc?

Then, there's the fact that European business might not be as amenable to investing in more very long-lasting equipment (say, plants or buildings), since the population is likely to decline over the next century, and if equipment's still around when the labor force is shrinking, that might be wasted, whereas the U.S. is going to need plenty of capital, since it's labor force looks like it will grow a lot.

Julian Elson

Posted by: Julian Elson on November 15, 2002 02:44 PM

"...since the population is likely to decline over the next century, and if equipment's still around when the labor force is shrinking, that might be wasted, whereas the U.S. is going to need plenty of capital, since it's labor force looks like it will grow a lot."

Is this a subtle way of saying that the Europeans are doomed? A growing population usually means economic growth.

Posted by: David Thomson on November 15, 2002 03:58 PM

It isn't a subtle way of saying the Europeans are doomed. It's a very direct way of saying that European population is likely to decline slightly over the next hundred years or so, and American population is likely to rise.

I fully expect that American economic growth over that period will exceed European economic growth. That doesn't mean that your typical American will be better off than your typical European. I assume that they'll be roughly equally well off, as is true now.

So how the economies of Europe and the U.S. perform depends on what you mean. For example, which is the richer country, a country with $100 billion and 10 million people, or a country with $150 billion and 20 million people? If you answered the first, then I don't see why Europe and the U.S. would converge or diverge in standards of living in the future. If you answered the second, then the U.S. will probably overtake Europe significantly.

Most of us, however, I think, would view the first criterion, standards of living, as more important, as economists and economically-minded people, who are wont to visit this blog, generally view growth as a way to satisfy human wants (which would not be more satisfied if more wealth is matched by a proportional increase in population), not an end to itself.

Posted by: Julian Elson on November 15, 2002 05:33 PM

It boils down to this: will most people comprising the added population of the United States be productive? If so, America will inevitably grow stronger. You conveniently forget that the Europeans currently live decently because they parasite off the military might of the United States. They don't fight their own battles, but wait for the Americans to pull their bacon out of the fire.

Last but not least, Europe is doomed if it continues with its Socialistic ways. The Europeans will keep falling behind the curve. The current situation is Germany may be reaching crisis proportions.

Posted by: David Thomson on November 16, 2002 02:36 AM

C'mon David, let's not be so sweeping. There's good and bad on both sides of the Atlantic. The Europeans have unions and a rigid employment market. The Americans have lawyers and an inefficient legal system. Both sides are not living within their means. Americans are up to their ear in debt; Europeans have unmet pension obligations. And so on.

Socialism has its advantages and disadvantages as well. It is usually disparaged because it allocates resources inefficiently, but let's not forget that the greatest misallociation of resources since the Soviet Union was the stock-market bubble in the U.S. European-style socialism also leads to a more even distribution of income, again which has advantages and disadvantages. And so on.

With the Soviet Union gone, the Europeans would live decently with or without the American military. In fact, they are now in the sights of TIMD (terrorism inflicting mass destruction), thanks to their support of the U.S. after 911.

You talk about the military parasitism, but what would you do? Wave a magic wand and have the Europeans spend more? It's not going to happen, and even if it did, guess what you would be the first to complain, because it would also mean the Europeans could claim equal say - and there goes the war on Iraq. Or would you have the Americans spend less? Now there's a thought...

America may spend more on the military, but the French for instance spend a lot more on diplomacy and attempts to out-reach to other cultures. They use diplomacy as an extension of war, and they get results. The U.S. cuts back on spending on the State Department - never learning how to talk, the only thing it can do is fight, so it has to spend more on the military. What was that saying about a stitch in time saves nine?

Posted by: Andrew Boucher on November 16, 2002 08:10 AM

Curious. We come from and go to Europw regularly. Guess what. The English and French and Germans and even the dread Swedes live quite well and contentedly on the whole. The are ways to live well other than by merely copying America, and there is no sign that Europeans intend to copy us more than they alredy have any time soon. We do like Amsterdam. Try it.

Posted by: on November 16, 2002 01:27 PM

"C'mon David, let's not be so sweeping. There's good and bad on both sides of the Atlantic. The Europeans have unions and a rigid employment market. The Americans have lawyers and an inefficient legal system."

The Europeans must do something about “rigid employment market.” Indeed, Americans have lawyers---and that’s a reason to vote Republican! The Democrats are too cozy with the trial lawyers.

“Socialism has its advantages and disadvantages as well. It is usually disparaged because it allocates resources inefficiently”

Socialism has zero long term benefits. Allocating resources inefficiently is enough reason to condemn Socialism. It acts lie a cancer that will inevitably destroy its host.

“but let's not forget that the greatest misallocation of resources since the Soviet Union was the stock-market bubble in the U.S. “

The capitalist system severely punished those people who participated in the stock-market bubble. A socialist economy tends to protect them from their own mistakes.

"With the Soviet Union gone, the Europeans would live decently with or without the American military. In fact, they are now in the sights of TIMD (terrorism inflicting mass destruction), thanks to their support of the U.S. after 911."

Nothing could be further from the truth. You are being targeted simply for being a Westerner. Europe’s relationship with America has absolutely nothing to do with it.

"You talk about the military parasitism, but what would you do? Wave a magic wand and have the Europeans spend more? It's not going to happen, and even if it did, guess what you would be the first to complain, because it would also mean the Europeans could claim equal say - and there goes the war on Iraq. Or would you have the Americans spend less? Now there's a thought..."

America cannot spend less. It’s up to the Europeans to do more. We are all at war with militant Islamic radicals who wish to put us to death.

"America may spend more on the military, but the French for instance spend a lot more on diplomacy and attempts to out-reach to other cultures. They use diplomacy as an extension of war, and they get results. The U.S. cuts back on spending on the State Department - never learning how to talk, the only thing it can do is fight, so it has to spend more on the military. What was that saying about a stitch in time saves nine?"

America also practices diplomacy, but sometimes a nation must know when to go to war. Talking doesn’t always get things done. This is especially true with totalitarian thugs like Hitler, Stalin, and Saddam Hussein.

Posted by: David Thomson on November 16, 2002 03:21 PM

"Most of us, however, I think, would view the first criterion, standards of living, as more important, as economists and economically-minded people, who are wont to visit this blog, generally view growth as a way to satisfy human wants (which would not be more satisfied if more wealth is matched by a proportional increase in population), not an end to itself."

Unless, of course, having children happens to be among those "human wants". In that case, a higher population growth with respect to economic growth might simply indicate that individuals in this country are showing different consumption preferences (more children, less other stuff).

Posted by: on November 21, 2002 02:37 PM

"The capitalist system severely punished those people who participated in the stock-market bubble. A socialist economy tends to protect them from their own mistakes."

Investing in the capitalist system is a gamble that has made some people rich and many others impoverished. The European Socialist system allows for a better safety net that the citizens of those countries are happy to keep despite whatever imperfections may exist. They don't envy us.

Posted by: SUZI QUE on December 2, 2002 10:02 PM

Posted by: SUZI QUE on December 2, 2002 10:03 PM