The U.S. has typically harnessed technological advancements more rapidly than other countries. It has kept this productivity lead during the digital revolution. However, at least parts of Europe also appear to be prepared for the future.
The U.S. has historically been better than Europe at using technological progress to boost its productivity. Pictured: An engineer in 1950 inspecting a large compressor for a wind tunnel.
UIG / Getty
Economists and reformers have long complained about the so-called European productivity puzzle, worrying that Europe is less and less able to keep up with the dynamic United States. But when people say that productivity growth is too low, what do they actually mean?
A country’s economic performance depends on how much labor and capital are available, and how productively these factors are used. Labor productivity can be measured as the average amount of economic output that a country or region generates per hour worked, or per full-time employee. Capital intensity refers to the average amount of capital associated with each hour worked. Economists also try to ascertain the size of a technological multiplier that measures how productively labor and capital inputs are used. This is called total factor productivity (TFP). The bigger this multiplier, the more productive the economy is.
Three researchers affiliated with the French central bank have been investigating exactly this question, and have compiled a comprehensive database with data on productivity trends in developed countries since the beginning of the 20th century.
Caught up, then left behind
This data allows us to compare national trends with regard to labor productivity per hour worked. At first glance, this confirms that Europe trails the U.S., but also provides further interesting insights.
Labor productivity has grown faster in the US than in Europe since the end of the 1990s
GDP per hour worked, in 2010 dollars adjusted for purchasing power
The U.S. was already particularly successful in the golden 1920s in harnessing the benefits of the industrial revolution and using them to boost nationwide productivity levels. Europe, on the other hand, began to catch up only after World War II, which left an indelible mark on the continent’s economies. However, today’s economic leaders within the eurozone did manage to catch up with the United States in the mid-1990s, increasing their productivity sixfold in real terms compared to 1950.
Yet it was precisely at this time that a new technological push began in the United States, triggered by the internet and the new opportunities offered by telecommunications advancements. American companies were once again quicker than the average eurozone country measured here to take advantage of these new innovations, and more successful in doing so. While labor productivity per hour worked has increased by 29% in the eurozone countries since 1995, the corresponding increase in the U.S. has been almost twice that, at 53%.
The resolution adopted at the EU summit in Lisbon in 2000 to «become the most competitive and dynamic knowledge-based economy in the world» over the succeeding decade has obviously not borne much fruit. Instead, the structural tensions in the newly implemented monetary union, as well as the major European financial and banking crisis that was exacerbated by these tensions, slowed productivity growth.
Anglo-Saxon lead is diminishing
However, it is also interesting to note the consistently comparatively low labor productivity of the Japanese (despite their relatively high capital input), as well as Switzerland’s almost equally consistent lead. Australia and Canada, both resource-rich countries that were at the head of the pack in the early 20th century, proved unable to keep up on this measure.
Technological progress has boosted productivity in all developed countries
Productivity multiplier (TFP) that goes beyond the mere use of labor and capital, 1950 and 2022
Comparing total factor productivity in 1950 and 2022 clearly shows the far-reaching changes. In 1950, it was above 15 only in the Anglo-Saxon countries of Australia, Canada, New Zealand and the United States. In Europe, Switzerland, which was spared the war and was already particularly open to the rest of the world as a financial center, stood out with a value of 25, while TFP in the eurozone was only 7.
But by 2022, the technological progress emanating from the Anglo-Saxon countries had obviously diffused widely.
Northern and Central Europe catch up
And that’s not all. Over time, the Central and Northern European countries have effectively caught up with the United States, while Japan, Canada and Australia have fallen far behind.
Labor productivity in Southern Europe has fallen behind
GDP per hour worked, in 2010 dollars adjusted for purchasing power
A closer look at labor productivity trends shows that the European productivity puzzle is mainly a southern European one. Greece and Portugal, which remain more agrarian than most other European economies, were already falling behind in the 1970s. The euro crisis set back labor productivity in Greece even more. Italy and Spain have been falling behind since the 1990s. Today, labor productivity in the southern countries (including France) is on average a third lower than in northern and central Europe.
Switzerland as a special case
Switzerland appears as a special case, as it has been the uncontested productivity leader among the countries examined here since the end of World War II. This can be explained in part by a particularly high capital intensity for each hour worked, with this level having increased disproportionately since the early 1970s. The financial center and capital market’s early international orientation, the stability of the Swiss franc, and the country’s openness toward the rest of the world appear to have paid off.
In contrast, there have been hardly any differences in capital intensity between the eurozone countries and the United States since the beginning of the century.
Switzerland owes its high labor productivity in part to above-average capital investment
Capital input per hour worked, in 2010 dollars adjusted for purchasing power
But what does this mean for the future?
The persistent differences in various countries’ abilities to increase the productivity of their economies and thus their overall prosperity are quite notable. Beyond the different national mixes of labor and capital inputs, these differences appear in the data examined here as the «black box» of total factor productivity. However, economic research, economic policy practice and the historical aspects discussed here allow us to identify some key factors:
Human capital: The workforce’s average level of education and the availability of researchers and cutting-edge research capabilities (collectively referred to human capital) are vitally important. As these factors influence economic activity, the economy tends to form dynamic clusters, which then benefit disproportionately.Openness: Countries that are particularly internationally specialized and open to trade have an advantage.Capital market: Having an internationally oriented, liberalized capital market and a competitive financial center helps to finance progress and accelerate structural change. Mobilizing private capital can help finance the development of modern infrastructure.Creative destruction: Productivity advances result from innovation and the replacement of traditional processes with new ones. Innovation – whether through new industrial processes, digitalization or the use of artificial intelligence – must spread within companies. Labor and capital should be able to be reallocated through so-called creative destruction in flexible markets.Competition: The more intense and unhindered private competition is, the faster new technologies spread, and the faster productivity increases in an economy. Protectionism slows down progress.Superstar companies: The cross-border use of modern communication technologies and artificial intelligence is associated with strong network effects and economies of scale, thanks to which only a few large companies in any given sector are outstandingly innovative and productive. Countries that are able to attract such superstar companies (such as the tech companies in the U.S. or Nestlé and the large pharmaceutical companies in Switzerland) benefit from this enhanced productivity, but they must be careful that competition does not suffer as a result.Institutions: Traditional location-specific factors also help to explain relatively persistent differences between poorer and richer countries. These include the presence of a well-functioning judicial system that guarantees legal certainty, freedom and order; a lean but efficient state; and a functioning democracy that provides institutional safeguards for a peaceful societal consensus.
Currently, Switzerland ranks at the top of international comparisons in these areas. The challenge for the country in the future will be to keep it that way. The eurozone countries perform differently depending on the country. However, Europe is not hopelessly behind, and has shown in the past that it can catch up. Under a best-case scenario, productivity gains will diffuse even more strongly to the poorer countries of Southern and Eastern Europe in the future. However, highly centralized bureaucracies and state transfers will not facilitate this. First and foremost, these countries should continue to improve the location-specific factors described above.
Latest articles
Below, you’ll find links to a selection of our free content. If you’d like access to all of our content, including the full version of our twice-weekly newsletter, please upgrade here.
Global reporting from Switzerland. Independent since 1780.
The NZZ is one of the preeminent news sources in the German-speaking world, with a tradition of independent, high-quality journalism reaching back over 240 years. With an industry-leading network of foreign correspondents and a team of expert editors in Zurich, we offer fact-based analyses, in-depth investigations and top-notch reporting: a global view with a fresh perspective.
Sign up for our free newsletter or follow us on Twitter, Facebook or WhatsApp.
Source link : https://www.nzz.ch/english/in-productivity-race-us-still-edges-europe-but-not-everywhere-ld.1825094
Author :
Publish date : 2024-04-08 07:00:00
Copyright for syndicated content belongs to the linked Source.
