US productivity "slowing sharply" - UK, Europe losing ground

A new Conference Board report warns that U.S. Productivity Growth Slowing Sharply as Emerging Markets Catch Up. According to the media release:

The times of extraordinarily high U.S. labor productivity growth rates are over, at least for now, according to a report released today by The Conference Board. 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... "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%.

Wednesday's Financial Times highlights the fact that UK productivity lags US. Chris Giles writes that these figures "suggest that Gordon Brown’s central ambition to raise the relative performance of British productivity has not yet been achieved."

Gordon Brown’s dream of British productivity to rival that of the United States is dealt a blow on Wednesday with the publication of figures showing the gap has widened since Labour came to power. Another poor year of productivity growth in 2005 has opened an even wider gap between Britain and the US, according to Conference Board, the global business organisation and a recognised world authority in global economic comparisons reports.

Since Labour came to power in 1997, Britain’s output for every hour worked has fallen further behind that in the US, mirroring weaknesses in France and Germany. In contrast, the efficiency of Britain’s economy had been gradually catching up with the US under previous governments.

In 2005, Britain’s output per hour worked rose by 0.9 per cent, according to the Conference Board. The level was the same as in Germany but well below the 1.8 per cent rise recorded in the US, the 1.9 per cent increase in Japan and the 1.5 per cent rate in France. The European Union 15 recorded a sharp fall overall but these figures have been distorted by an amnesty for illegal immigrants in Spain.

...When examining its own record, the Treasury concentrates on international comparisons of national output per worker; Britain’s relative performance appears better than France and Germany on this measure. But the Conference Board figures show the improvement is entirely due to an increase in working hours in the UK. Britain’s output per hour worked is just as far behind Germany and France’s level as it was in 1997 and even further behind the US.

Bart van Ark, the consulting director to the Conference Board, told the Financial Times that, alongside the other big European economies, the erosion of Britain’s productivity in comparison to the US was now an ongoing structural problem that had emerged in the late 1990s after decades when Europe had been catching up.

“The dynamics of how technology is used and diffused throughout the economy is much slower in Europe than in the US”, he said, adding that competition across European markets has not forced companies to adopt the best techniques as quickly as in the US.

The Conference Board release cites a very wide divergence in productivity performance by European countries:

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 FT's claim that Treasury use output per worker is not entirely fair. For some time now government department's have been citing the ONS international comparisons on productivity on both a per worker and per hour worked basis. I am doubtful of the Conference Board claim (see chart) of a big fall in UK productivity levels versus the United States. The ONS 'experimental' hour worked series has shown little change in relative levels and rankings over recent years, with UK productivity levels "ahead of Japan, but behind Germany, France and the USA, with France remaining the leader."

Comments

[Edward Hugh]

Most of the data about the US,Asia and eastern Europe and are relatively straightforward to interpret (although Japan is interesting). There is some kind of 'technological catching-up' going on. Also they are moving out of agricultural dominance, through industry and towards services, which again is a constnt productivity plus.

The Western European data is harder to interpret. This did stand out in the CB summary though:

"The U.S. and EU stand at two different points in their business cycle."....If Europe can stage an expected economic rebound, it might experience some acceleration in productivity growth."

This seems to be the big bet, that somehow the cycles are out of sync. But what if this isn't the case, and they are more or less harmonised (let's leave out the UK here, which is an outlier), and that trend growth in the Eurozone is just what we are seeing now? Maybe we are having the 'rebound'. That is my bet, and its perfectly explicable theoretically in terms of the growth and productivity slowdown with ageing populations (that's why Japan is interesting, since it *appears* to be bucking this trend, but we need to see more data, and more years). My guess is that as the US and China slow the eurozone will follow suit. Then it *may* become possible to have a rational discussion about just what exactly is going on.

India is also interesting:

"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."

This is again exactly what demographic dividend theory expects. There are two plusses to changing age structure, a compositional one (as the working age population becomes an increasingpart of the population as participation rates rise) and a behavioual one (as the core of the 'thickest generations' move up the age ranges they acquire more experience and productivity rises). We are seeing a dominance of the former effect in India now, and a domiance of the latter one in China.

[Edward Hugh]

"with France remaining the leader."

A number of things here are very important to keep in mind. There are three (or more) possible measures: gdp per hour, gdp per worker, and toatl factor productivity (ie including the capital share). Each of these has its uses, but non is definitive.

gdp per worker depends very much on participation rates, which in the end depend on age compostions and efficiency in the labour market. Germany, eg, does worse than the Uk on this on both counts, but France only on the labour market inefficiency one (since the age composition is broadly similar).

Where France is interesting is in that there are relatively low participation rates among younger and older workers. This means that most of the people working are what are called prime age workers, who by definition are the most productive. That is why per-worker productivity in France is so high (although, of course, this doesn't tell you whether capital is being used efficiently or not). Ironically labour market reforms in France would worsen productivity for the reason mentioned.

Now I am thinking about this, this could be part of the Japan explanation. As Dave Altig is noting in the US, participation artes are down due to lower participation among young people. Now.....

This can be produced by the interaction of two processes. Firstly the growing skill bias of wages can encourage young people to study more and get better qualifications, and secondly the preponderance of temporary contracts, fragility of employment, low rewards, can encourage (on the margin) more study, since working may be considered to be 'not worth the candle'. This pushes per hour productivity up.

It also delays home formation, and postpones first births, thus reducing fertility, but that is another question for another day........

[Claus Vistesen]

"Ironically labour market reforms in France would worsen productivity for the reason mentioned."

But hopefully French labour market reforms would do something about a structural unemployment rate of 10 %. I am particular talking about the mandatory financing of social security regimes today levied on employers and employees.

[Jürï Saar]

Any one have an idea, where I could find productivty data for new member of the European Union - EU 10?

[Edward Hugh]

"But hopefully French labour market reforms would do something about a structural unemployment rate of 10 %."

Oh of course, I am completely in favour of them, in particular becuase the exisiting set-up produces 'insiders' and 'outsiders', and some of the ousiders caught a lot of the headlines late last year. I was simply indicating that they won't necessarily have all the consequences which many expect.