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July 20, 2006
The Chairman Speaks: Why Don't Rising Productivity Tides Raise All Boats (Equally)?
Until around 1995, postwar labour productivity grew much faster in Europe than in the United States. But since 1995, Europe’s productivity catch-up ground to a halt and then reversed. The ratio of EU-15 relative to US average labour productivity, using 1995 PPP exchange rates, was 77% in 1979, reached 94% in 1995, and by 2004 had slipped back to 85%. About half of this reversal was from the US surge in productivity growth, which has been much analysed. But the other half of the story, Europe's productivity slowdown, hasn't.
Whad'ya know. It turns out that Chairman Bernanke also had some things to say about this topic yesterday as well (in response to a question from Rhode Island Senator Jack Reed):
I think the primary source of the productivity gains are two.
First is the improvements in information and communication technology we've seen over the last 20 years or so.
But secondly, the United States has done a lot better at using those technologies than a lot of other industrialized countries. And I think that relates to the fact that we do have very flexible product and labor markets, we have deep capital markets that provide funding for new ventures, and we have an economy that has an entrepreneurial spirit. So we made better use of those technological changes than some other countries.
I think that is the primary source of our productivity gains...
There's some very interesting research done by the McKinsey Corporation. It's looked at firms around the world and looks at their productivity gains. And what it finds is that firms that are exposed to competition, as unpleasant as that might feel, they increase their productivity gains much more rapidly.
And so, one of the benefits, I think, of a more open trading system, a more open economy, where we compete with and trade with countries around the world, despite the fact that it does create stress and sometimes changes and dislocations, is that competition forces productivity gains and has been, I think, a source of growth for us as well as for our trading partners.
For what seems like a quite different take on the issue, check out the paper highlighted in The New Economist post linked to above, which claims it is European tax cuts that have slowed their productivity growth. My instinct is to side with some version of the Bernanke explanation. But there is rarely a single factor that provides a fully satisfactory explanation of any particular set of facts, and I haven't read the paper cited by TNE. So I'll leave it as an open question.
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Tigers, tortoises and textbooks
Until around 1995, postwar labour productivity grew much faster in Europe than in the United States. But since 1995, Europe’s productivity catch-up ground to a halt and then reversed. The ratio of EU-15 relative to US average labour productivity, using... [Read More]
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