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U.S. Productivity Growth Slowing Sharply as Emerging Markets Catch Up

Monday, January 23, 2006

Press release from the issuing company

Jan. 17, 2006 -- Though still healthy compared with many other developed nations, the productivity growth rate slumped to 1.8% in 2005 in the United States, down from 3% in 2004. "The U.S. performance is still good compared to Europe," says Bart van Ark, Director of The Conference Board international economic research program and co-author of the report with The Conference Board Economists Catherine Guillemineau and Robert McGuckin. "What is striking in these new numbers is the sustained productivity acceleration in the emerging markets of Central and Eastern Europe and Asia. In fact, economies such as China and Poland are accelerating to around 8%." The Conference Board is one of the few providers of comprehensive worldwide measures of labor productivity, which is a powerful indicator of economic efficiency. Labor productivity, which measures the amount of output obtained for each hour of work, determines a nation's living standards (measured by per capita income). The more hours people work and the higher the level of productivity, the higher is per capita income. Most countries in the developed world (North America, Europe and developed Asia) experienced a slowdown in productivity growth rates in 2005, with growth rates in the 1.5% to 2% range. Compared to the U.S., productivity was about the same in Japan (1.9%), but much worse for the average of the EU-15 (0.5%). A Productivity Surge in Eastern Europe, India and China Countries at the higher end of the global productivity spectrum are mainly emerging markets, including Eastern and Central European economies - e.g. Poland (7.7%). While Mexico's productivity growth rate was relatively low at less than 1% per year both in 2004 and 2005, Korea (2.6%) and Turkey (3.7%) remained at the higher end of OECD countries. But India and in particular China showed much faster productivity growth at 4.4% and 8.4% respectively in 2004. China is the undisputed productivity leader in Asia, with productivity growth of 8.7% per year on average since 2000. "This significant acceleration in productivity growth is striking as average productivity growth in China was just 3.1% from 1995-2000," says van Ark. "This suggests that the dramatic changes in reform policies and the increase in openness prior to China's ascension to the World Trade Organization showed their major impact during the most recent years." India's slower productivity growth (4.4% in 2004, and 4.1% on average from 2000-2004) should be seen in the perspective of faster employment growth at about 2% during recent years, which is double the growth of labor input in China. China experienced a similar phase of moderate productivity growth during the late 1980s and early 1990s. Western Europe Slows Further; Eastern Europe Catches Up Productivity and labor input growth continued to be disappointing among the pre-2004 membership of the European Union (EU-15). Following a slight recovery of productivity growth in 2004 to 1.4%, productivity slowed to 0.5% in 2005. Growth in total working hours remained broadly unchanged from 2004 to 2005 (1.1% in 2005 versus 0.9% in 2004), leaving GDP growth at no more than 1.6% in the EU-15. At the lower end of the productivity spectrum are European nations, notably Italy (-0.9%) and Spain (-1.3%), bringing the average of the EU-15 down to 0.5%. But productivity in Germany and the UK was also slow, both at 0.9% in 2005. Only a handful of smaller Western European economies (Denmark, Greece, Iceland and Norway) exceeded U.S. growth rates. Ireland, which topped the EU-15 league from 1995 to 2003, also saw a slowdown to less than 1.5% since 2004. However, the new European member states raised the European Union average. Most of the EU-10 showed a spectacular acceleration in labor productivity growth in 2005. On average, the 10 new member states of the EU increased the labor productivity growth rate from 4.1% in 2004 to 6.3% in 2005. On average, employment growth in the EU-10 remained stable and positive at 1.1% in 2005. Only Hungary failed to experience higher total working hours, with a slight fall in labor input at -0.1%. The U.S. and EU Are Not on Parallel Courses The U.S. and EU stand at two different points in their business cycle. As U.S. GDP growth slows, U.S. productivity growth is likely to slow again compared to 2005. While productivity slowed, U.S. labor input growth, measured in total working hours, accelerated from 1.2% in 2004 to 1.8% in 2005, partly offsetting productivity as a contributor to Gross Domestic Product growth (GDP increased by 4.2% in 2004 and 3.6% in 2005). "These are normal cyclical changes," says van Ark. "After three years of exceptional productivity growth, U.S. companies have finally started to add workers. Overall, this is a very balanced performance." If Europe can stage an expected economic rebound, it might experience some acceleration in productivity growth. But in the longer run, productivity growth depends more strongly on the structural characteristics of the economy. These include the flexibility of labor and product markets, which foster the reallocation of labor and capital from less to more productive economic activities. Many economies in the EU-15 are only slowly coming to terms with the challenges that the world economy puts on all advanced and emerging economies to realign competitive forces. These long-term factors may be more important in determining productivity growth rate, and underline the urgency to deal with structural reforms and stronger innovation efforts.




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