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July 24, 2006
Why Don't Rising Productivity Tides Raise All Boats (Equally)? A Clarification.
Last week I contrasted some comments by Ben Bernanke on productivity growth in the U.S. relative to other industrialized economies with the a results of a paper by Ian Dew-Becker and Robert Gordon titled "The Slowdown in European Productivity Growth: A Tale of Tigers, Tortoises and Textbook Labor Economics." My claim was that while Bernanke points to things like greater labor market flexibility and competition in the U.S., Drew-Becker and Gordon's research points to tax policy in Europe.
Ian -- the author of the aforementioned research -- took me to school in the comment section of that post:
In that paper, I don't think we so much disagree with Bernanke's explanation as argue that there is more to the story (as you say). If you break the LP growth gap into TFP and capital deepening, TFP accounts for the majority -- that's what Bernanke is referring to. The problem is, TFP is pretty tough to talk about -- it's just a residual.
When Bob and I talk about the effects of tax rates, we're referring to capital deepening. It's also important to note, as have other papers recently, that capital deepening in the US recently has been driven by low hours worked, rather than high investment -- slightly troubling.
Well, those are certainly great points. Lesson learned.
UPDATE: While we are on the topic, this comes from today's Wall Street Journal (page A1 of the print edition):
After a long slump, strong exports and new flexibility in companies' labor relations are laying groundwork that could sustain economic recovery in Germany and some other parts of Europe...
The euro region is poised to post its strongest economic growth since the technology boom of 2000. The 2.2% expansion projected for this year would be the largest improvement in the growth rate among the world's big, developed economies. Amid signs that U.S. growth is losing steam, it is a timely revival that could help prevent a global slowdown...
...Germany is Europe's largest economy and in recent years has been one of its most stagnant. But the nation has led in developing a robust export industry and in the corporate restructuring that has finally begun to create jobs.
... Europe's economic slump has given companies new muscle in their negotiations with workers. Governments in Europe have been slow to overhaul worker-friendly labor laws for fear of incurring voters' wrath. That slowed job growth as companies transferred operations overseas where labor costs were lower. High unemployment in Europe depressed consumer spending, helping limit economic growth in the past five years to a meager 1.4% average in the 12 countries that use the euro...
German industry has gone furthest in overhauling work practices within the strict labor laws and union accords common across Europe. Companies now are pressing their employees to work longer, more flexible hours and to forgo pay increases, using the threat of moving jobs abroad as bargaining leverage. While pinching employees, the changes have made operating in Germany more attractive, stimulating local investment and helping the country hold on to more jobs.
If you are the type who likes to think in terms of what developments like these could mean for, I don't know, the value of the dollar or something, the WSJ article might be usefully read along with this.
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