International
Europe suffered a slowdown in labour productivity in 2007; Rich countries face struggle to achieve rises in living standards
By Finfacts Team
Jan 16, 2008, 03:05

Bart van Ark, Director, International Economic Research, The Conference Board and Catherine Guillemineau, Economist, The Conference Board, at a briefing at the Foreign Press Center, New York. Dr. van Ark is also a full professor at the University of Groningen, the Netherlands, in the area of Economics of Productivity and Technology Policy, which is a chair endowed by The Conference Board.

Europe suffered a slowdown in labour productivity - growth in output per hour worked - growth in 2007 as the business cycle passed its peak and structural reform remained sluggish.

The latest annual productivity report from The Conference Board, the international business membership and research organisation, shows output per hour worked rose by 1.4% across the 27 European Union states in 2007, down from 1.7% the previous year. It is expected to slow further, to 1.3%, in 2008 in the EU27, and even to 1% in the “old” 15 member EU. For the second year running, however, Europe performed better than the US, where productivity rose by just 1.1%.

The disappointing European average was the result of weak productivity growth in a number of major economies, including Germany (1%), France (0.6%), Italy (1%) and Spain (0.6%). But it masked some impressive performances, most notably in the UK where productivity rose by 2.9 per cent, making it the top performer among the EU15.

Recession concerns and the credit crunch cloud the US economic outlook for 2008, but US productivity growth will accelerate to 1.7% this year, while Japan's rate will pick up to 1.9%.

With business cycles past their peaks, annual productivity growth in the advanced economies has slowed to between 1% and 1.5%. Despite better European performance in the past two years, the US maintains its productivity edge over the longer term.

Productivity growth rates in Europe, Japan, and the US were low in 2007. At 1.1%, US labour productivity growth continued to underperform compared to the longer-term, structural productivity trend of between

 1.5% and 2.5%. Growth rates for Europe and Japan came in at just 1.4%.

US labour productivity growth was close to that of many European countries, such as Germany (1%) and France (0.6%). Only five countries (Austria, Finland, Greece, Ireland, and the U.K.) saw productivity growth rates well in excess of the US The U.K. recorded the fastest labour productivity growth rate in the EU-15 at 2.9%, which is the result of very strong GDP growth at 3.1%, but a meager improvement in working hours at only 0.2%. Ireland's productivity growth rate was 2.3%.

The United States, despite its recent string of relatively anemic annual productivity growth rates, seems better positioned than most European countries and Japan to raise productivity growth beyond 2 percent because more restructuring has been realized in the past decade or two. As is clear from detailed “sources of growth” analysis, innovation is more deeply embedded in the business process in the United States, particularly in service industries. Large investments in information and communications technology (ICT) have gone together with rapid increases in efficiency, which are not found in Europe and Japan. However, Irish labour productivity has been boosted because of the overwhelming dominance of US companies, in the Irish economy.

The report warns that advanced economies will need to raise annual productivity growth to well above 2% over the next two decades to maintain current living standards. Given the limits to labour force growth almost everywhere, the onus will be on technology and innovation to drive the growth process.

Despite the slow increase in US labour productivity, the level of GDP per hour worked is still among the highest in the advanced economies. In 2007, output per hour worked was US $52.10 — very close to the levels of France, the Netherlands, and Austria, and only significantly behind two smaller economies: Norway ($70.10) and Luxembourg ($70.30).

Challenge from Emerging Economies

Meanwhile, in emerging economies, productivity growth continued to accelerate, topping 8% in the BRIC (Brazil, Russia, India, China) countries on average in 2007, accelerating from 7.5% between 2000 and 2005. There were large differences between the individual economies, however, with China notching up 10.6% growth while Brazil managed just 1.9%. Employment growth was slowest in Russia (0.6% from 2000-2007), followed by China (1%), but much faster in Brazil (2.7%) and India (2.5%).

Bart van Ark, executive director of economic research at The Conference Board, said: "Rapid adjustment to competitive pressures and greater innovation in emerging economies have made fundamental and lasting changes in the global competitive landscape. One of the most significant changes is the emphasis on innovation-related spending in the emerging world. While expenditure on R&D and investment in information and communication technology in emerging economies are still at less than half of the level in advanced economies, the spending gap is narrowing. This reflects a commitment to compete on the basis of innovation capacity, not just cost."

Productivity levels in emerging economies are still very low at between 10% and 40% of the US level. However, as the wage gaps are generally even larger, the labour cost per unit of output provides a cost competitiveness advantage to emerging economies which for manufacturing can be as low as 20% of the US level and 25% of the European level.

Europe also Slowing

Europe suffered a slowdown in labour productivity growth last year as the business cycle passed its peak and structural reform remained sluggish. Output per hour worked rose by 1.4% across the 27 European Union states in 2007, down from 1.7% the previous year. It is expected to slow further, to 1.3%, in 2008 in the EU-27, and even to 1% in the "old" 15-member EU. For the second year running, however, Europe performed better than the US.

The disappointing European average was the result of weak productivity growth in a number of major economies, including Germany and France, but it masked some impressive performances, most notably in the UK.

One reason for Europe's productivity growth slowdown is that most advanced countries were at, or already well past, the peak of their business cycles. This means that the employment growth rate accelerated faster than the output growth rate. With growth now slowing, additional jobs may not help boost productivity in the short run. Productivity growth in Europe also stayed well below its long-term average trend as a result of persistent structural inefficiencies.

"While some progress is being made on structural reforms, particularly in labour markets and services industries, many of these reforms have come late and are often patchy," says van Ark. "Furthermore, Europe seems to have greater trouble in having innovation and knowledge creation turn into the creation of more productive jobs, as GDP growth and employment — at least in the short run — often offset each other."