Productivity growth: US slows, Europe picks up

A piece in today's FT Lex column on US productivity growth notes that non-farm business productivity "declined in the fourth quarter for the first time since spring 2001."

US productivity growth has been slowing pretty steadily for more than two years. Simultaneously, the evidence has strengthened that large parts of Europe are experiencing a renaissance. Productivity advances seem to be spreading from the Nordic countries to Germany.

It remains too early to say whether these trends will suffice to close the still sizeable transatlantic gap in trend productivity. Cyclical factors have played a large role. In any case, quarterly and even annual trends contain far too much noise to be of much use for either policymakers or investors. The US, for example, looks likely to experience a sharp rebound in the first quarter.

In the longer term there are, nevertheless, several reasons why the gap should shrink further. Europeans manufacturers have lagged their American counterparts in unleashing the potential of information technology, but seem to be catching up. They also continue to contribute a much larger share of economic output than in the US. US employment has mainly been growing in such areas as construction, education, healthcare and leisure, where productivity growth is hard to come by.

Finally, European statisticians are shrinking the gap with their US counterparts, in accounting more generously for quality improvements. It is debatable whether that will improve the quality of the numbers, but it will make them look more appealing for Europe.

Lex is certainly right about Germany, which has managed to contain wage pressures while lifting productivity growth. The result is an impressive decline in real unit labour costs over recent years, boosting its export competitiveness. Likewise most of the Nordics. If only Italy could follow their example!

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