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May 18, 2005

The EU Productivity Bust

This picture, from Martin Wolf's latest column in the Financial Times, is worth a thousand words:


Here's the source, if you are interested: Robert McGuckin and Bart van Ark, Performance 2005: Productivity, Employment and Income in the World's Economies, www.conference-board.orgIt will set you back $295 if you want to own your own copy.

May 18, 2005 in Data Releases , Europe | Permalink


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» Socialism Works! Oh, Wait... from verisimilitude
Charts and graphs are so much fun. You can pack so much revealing info into just one little bar graph (thanks, Tyler). Anyone still want to place that long bet that the EU will be anywhere near being an economic peer to the US in 10 years? Anybody? Be... [Read More]

Tracked on May 21, 2005 5:37:56 PM


Lest we feel too confidant may I direct you to your own post on Sarbanes-Oxley? We'll do ourselves in yet.

Posted by: Dave Schuler | May 18, 2005 at 12:49 PM

I'm not disputing the overall picture (which is consistent with everything else I've been reading), but I always ask the same question when faced with a chart such as this: why were those particular years selected?

The first bar is a 9-year span, the second a 10-year span, the third is a 4-year span which overlaps the second. This seems like a very strange dataset. An set of line graphs indicating annual productivity growth for each year between 1987 and 2004 would seem more appropriate.

To reiterate: I don't dispute the overall picture - I've no doubt that my suggestion above would indicate the exact same thing. But the chart itself looks wrong.

Posted by: Independent George | May 19, 2005 at 09:17 AM

Why then is Europe running a trade surplus but the UK and US are in deficit? I think you read too much into what I think are pretty shodily measured statistics. I live in Germany, and I lived before in the UK and it is not obvious that these statistics mean very much in terms of what is important to ordinary people. And please remember when you compare the UK to Germany that the UK started from a very low level of productivity in the 1980s. I know I was there.

Posted by: Jim Brady | May 20, 2005 at 07:59 AM

I got a little confused from the postings of Independent George and Jim Brady. Let me start with George. His suggestions that the picture would be better if it showed the actual annual change in productivity is a bad one. Changes in productivity are quite volatile during the phase of the business cycle. They add a lot of noise to the picture, making it difficult to identify the trend. Using a 9-year average on the other hand eliminates (averages out) the business cycle effects (given that each phase lasts about 3 to 4 years), and allows us to see where the economy is heading. Although there is some merit to his comment that the choice of 1987 as a starting point is somewhat arbitrary, well, we have to start from somewhere. The question is, does this choice alter the picture? But he also acknowledges, and economists in general agree, that the growth of labor productivity in the US has picked up since 1995. So what is all the fuss about?

As for Brady's blending of trade deficits and surpluses with changes in productivity, one has to wonder how it makes any sense. It shows clearly the dangers of simplistic thinking in terms like "surpluses are good and deficits are bad". The US deficit is a result of the low levels of US national saving and the high levels of investment that make it necessary for the US to borrow from abroad. If the US invested less (to match its low saving) it would not have as high a deficit. But one can hardly make the argument that by doing so it would stimulate growth. In fact, the opposite would be true.

Posted by: Costas | May 20, 2005 at 03:09 PM

Oh, and I forgot to respond to Jim's comment about the things that are important to ordinary people. Many of those things (i.e. number of doctors per person, environmental quality, etc.) are included in the UN Human Development Index. In 2004, based on that index, US was ranked 8th and the UK was ranked 12th. France was 16th, Germany was 19th, Italy was 21st, well, you get the picture.

Posted by: Costas | May 20, 2005 at 03:22 PM

Hi guys --

I have to say that I'm with Costas, who covered the issues better than I would have. One other thing I might add. I think the European surpluses are mainly in Germany (and slightly so in France). Surpluses are not a general condition in Europe (see especially, Italy and Spain).

Posted by: Dave Altig | May 20, 2005 at 07:56 PM

Naturally, my position is much subtler than mentioned in a short post. However, what I wanted to point out is that if Germany productivity is falling so far behind why is it still running a trade surplus. If the US is so productive shouldn't its markets be swamped with its own output?

But I am anyway very suspicious of the value of these sort of average productivity measures. It is far to easy to be fooled by relative price movements and poor measurement of inputs and outputs. By all means measure productivity where it can be directly compared, but productivity measured across an entire economy should be taken with a grain of salt. International measurements even more so, since the statistics may not be directly comparable (ignoring issues like cyclical effects).

I'm not an expert in exactly how the statistics are put together but I'm not convinced we really know how to measure quality adjusted output QUANTITY in post-industrial (i.e. service) economies. Many of the "efficiency" gains in recent years have come at the expense of quality by any common sense view. I think the absolute level of productivity growth is therefore overestimated, so that the extent of the differences may be far less than it appears. It is also clearly true that there has been a clear substitution of services provided by firms, with effort required on the part of consumers themselves. It is much harder work to be a consumer these days. This work is not measured in your statistics.

Posted by: Jim Brady | May 23, 2005 at 09:31 AM

Just a further clarification. Economic progress is all about two steps forward and one back. I'm not sure we aren't measuring the two steps forward and not the one back.

I'm also not sure that we aren't moving from things we know how to measure properly to things we don't know how to measure and aren't kidding ourselves that we know how to measure them. We may be moving up the short-term value added curve, but I'm not sure we won't have to move back down again soon.

I'm just a sceptic about the numbers and I think you need to show me that we really are sustainably producing more of lasting value with fewer people:- and not just extracting commissions from asset price inflation or winning short term benefits from undervalued exchange rates.

Posted by: Jim Brady | May 24, 2005 at 06:15 AM

Jim, it is hard for me to explain in a few lines why the US is running a deficit, it usually takes me a few class lectures, but let me try by stating first that those deficits and surpluses have nothing to do with productivity, at least in the way you relate them. The US is running a trade deficit means that it is borrowing. It means that the goods and services that Americans consume (i.e. clothes, CD's. dining services, etc.) and the goods and services that make up business investmment (computers, software, etc.) are more than what we produce in the US. The difference is covered by borrowing from abroad. To stop borrowing we would have to do either of two things. Consume less, or invest less. But the question is why is Germany lending the rest of the world. Instead of lending their products to Americans which intend to use them to rpoduce more in the future, Germans could have made that investment at home to increase production capacity inside Germany. The fact that they don't is a symptom of sickness for the German Economy, not of health. As for productivity statistics, a series of papers have been published that show that if anything, statistics understate the impact that technological growth has had on consumers, simply because it is difficult to measure the increase in convenience to customers from not having, for example, to wait 30 minutes on the phone to get their credit card balance (because they can use the annoying nevertheless automated suystem), or not having to wait in line in the bank to make a transfer because they can do that over the internet. Cheers, Costas

Posted by: Costas | May 24, 2005 at 09:10 PM

I suppose I should take this opportunity to also appologize to Dr. Altig for taking over his blog. I just checked the "About" link and saw the details of the blog, whose link was forwarded to me by a friend. I hope I can make up by saying I am a fan of his work.

Posted by: Costas | May 24, 2005 at 09:33 PM

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