Conference Board: U.S. Productivity Rebounds; Europe Shows Substantial Decline
Friday, April 25, 2003
NEW YORK, April 24 -- U.S. labor productivity growth rebounded sharply in 2002 to 2.8% in 2001 and continues to outpace Europe's productivity gains, according to a study released today by The Conference Board. Productivity growth in Europe showed substantial decline (from 1.3% to 0.5% last year); Japan increased by 0.8%, and overall OECD nations showed a 0.4% increase in productivity growth. Says Robert H. McGuckin, Director of Economic Research of The Conference Board and co-author of the productivity report: "There is much to worry about in these productivity growth trends. The differences in productivity growth between Europe and the U.S. are closely linked to the production and diffusion of information and communications technology and an economic environment that limits opportunities for exploiting the new technologies." The new OECD members -- Czech Republic, Hungary, Poland, South Korea, and Mexico -- lag 54% behind the rest of the OECD in productivity, but collectively experienced faster productivity growth than any OECD country except Ireland between 1995-2002 (3.3% annual average). DESPITE SLOWER GROWTH, MANY EUROPEAN COUNTRIES ARE SHINING Six European countries showed higher productivity than the U.S. in 2002, as compared to four in 1990. The six were Norway, Belgium, France, Ireland, the Netherlands, and Germany, with Denmark in a virtual tie with the U.S. at number seven. "One needs to be a bit careful in looking at the productivity rankings for particular years," says Bart van Ark, co-author of the study and Consulting Director for The Conference Board's international research program. "While the rankings are relatively stable and reflect long-term structural factors, short-term shifts can come from cyclical shifts can form cyclical shifts or small changes for countries closely ranked. For example, the U.S. ranking fell to 10th in 2001, reflecting the depth of its recession." Looking beyond Europe, the rankings remained largely fixed over the period, because it takes a long period of sustained growth to make significant jumps in the productivity rankings. The two factors at work here: First, a wide range of productivity is observed among countries means the gaps between countries can be quite large. For example, despite faster growth, output per hour in Australia was still about $4 behind the EU in 2002. Gaps this large take some time to overcome. Second, since most developed countries exhibit growing productivity, it is only with much faster growth that a country can make substantial leaps in the rankings, even if the gaps are initially small. Among the 27 OECD countries for which The Conference Board has measures of output per hour, only Ireland (jumped 14 positions) and Finland (jumped 5 positions) showed significant gains in rankings between 1990 and 2002. EUROPE IMPROVES JOB OUTLOOK, BUT STILL TRAILS U.S. IN PER CAPITA INCOME The EU has significantly improved its employment situation since 1990, but has made no progress closing the 28% income gap with the U.S., as these employment gains have been offset by a decrease in working hours per employee (4% on average for the EU). While some of this difference is undoubtedly attributable to culture and taste for leisure, McGuckin notes that incentives of workers and business are very different between Europe and the U.S. "While there has been improvement in Europe, the reform process has been fragmented and not rigorously applied in the EU," says van Ark. In contrast to the EU, the income gap of the rest of the world (69 countries with over 90% of the world's Gross Domestic Product covered in the study) with the U.S. is overwhelmingly dominated by weaker productivity (96% of the gap) rather than lower employment as a percent of population. "The EU is clearly an outlier in terms of hours worked per employee," says McGuckin. "Seventy-six percent of the U.S. income advantage is explained by a significant gap in productivity between the U.S. and the rest of the OECD -- $11 per hour in 2002. In contrast, only 28% of the EU income gap with the U.S. is explained by productivity differences -- $2.25 per hour in 2002." Japan's productivity significantly trailed both the U.S. ($10.46 gap) and the European Union ($7.21 gap) in 2002. Despite lower productivity than the EU and an eroding advantage in hours worked with the U.S., Japan's per capita income was slightly ahead of the EU. WAR IMPACTS ARE DIFFICULT TO ASSESS The short-term outlook has shown recent weakness, but the fundamentals are still in place for moving beyond the current recovery portion of the economic cycle. While it is hard to assess the impact of the war, according to McGuckin, "the shift toward a services-led "new economy" for developed economies driven by technology is likely to continue. But the conflict may accentuate resistance to global integration and reduce productivity growth by raising the costs of integrating markets (both within and between countries) and reducing the shifts in resources needed for productivity growth."