Why Eurozone productivity lags

A new ECB report has examined the productivity lag of Eurozone services sector compared with the US. Here is an excerpt from the Finfacts reports, ECB report examines productivity lag of Eurozone services sector compared with US:

Weak labour productivity growth in the retail sector, caused by over-regulation and failure to keep pace with innovation at US rivals such as Wal-Mart, is a big weakness of the eurozone economy, according to the European Central Bank.

Restrictive regulation of opening hours and land use meant retailers in the 12 eurozone countries trailed US rivals in the adoption of new technologies and management methods, the ECB said in a report. As a result, retail prices had not fallen as much as they have in the US.

The report's authors say that the retail sector is an important part of the services sector where employment and economic activity are increasingly concentrated in terms of market structure. This sector has been a force driving productivity in the US, while its productivity growth decreased in Europe in the last decade. Regulation of retail trade plays a major role in explaining the productivity shortfall in Europe relative to the UK.

There was an overall positive impact of easing the opening hours and store size regulation on the sector’s performance and efficiency in OECD countries.

...The report, which was produced by experts from national central banks, is critical of measures to protect traditional shopkeepers against large rivals. Studies of France, Spain and Italy lead the ECB to say that job cuts happen anyway and prices rise faster.

The ECB report says one explanation for differences in retail sector labour productivity is the much larger average size of US shops.

The report says that gains in price flexibility brought about by increased competition are likely to be of a permanent nature. Overall, a higher level of competition in the services sector would tend to support more efficient and flexible services markets, facilitate adjustment processes and increase the resilience of the euro area to economic shocks.

Competition, Productivity and Prices in the Euro Area Services Sector (PDF) by the 'Task Force of the Monetary Policy Committee of the European System of Central Banks' was published this month as ECB Occasional Paper No. 44.

It is an impressive piece of analysis, totalling 141 pages in all - anyone interested in the Eurozone economy or productivity and growth issues should read it. The report draws the policy implication that  "measures aimed at increasing services market competition" are needed. However the case for other structural and microeconomic reforms appears to have been overlooked, which is a pity.

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