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Wednesday, July 26, 2006


Tom Geraghty

Not sure how you can conclude that the US does not have serious labor market problems, given slow wage growth and rising inequality over the last 3 decades. It has problems, just different ones from Europe.

And of course EU productivity growth was roughly double that of the US from the mid '70s to the mid '90s. And the measurement error problem can cut both ways . . . maybe Germany isn't as far behind US productivity levels as the numbers indicate. Maybe France is further ahead.

Tom Geraghty

It's also worth pointing out that 8 EU countries have had faster employment growth than the US since 2000 - Spain, Ireland, Italy, Netherlands, UK, France, Switzerland, and Portugal, while another 3 - Sweden, Finland, and Belgium are only slightly behind the US in job growth.

Again, the conclusion that in the US, labor market performance is not a problem is just plain wrong.

Tim Worstall

The Luxembourg income study. Adjusting for tax and transfers. Do you know if they adjust for non cash transfers (food stamps, housing vouchers etc) in the US?

Matt Festa

(1) If Europe were to increase their rate of employment, wouldn't this lower productivity (since presumably the unemployed are the less productive workers?)

(2) Shouldn't we also factor in Entrepreneurship, where I have read that the US has a clear advantage? (not sure where the data is on this, if someone can point it out to me).


Matt Festa

I found a paper that argues that productivity growth in Europe is over-stated compared to the US. http://ideas.repec.org/a/sls/ipmsls/v10y20054.html#author

Once adjusting properly, US Productivity growth is faster.

Granted, the Europeans have more vacation time and less working hours, but I think there is a strong argument to be made that the higher levels of unemployment are too high relative to the leisure trade off.

Arthur Eckart

Nine of the top 10 largest biotech firms in the world are American (a Swiss biotech is ranked third, see link below). The implication is productivity gains in prior economic revolutions, i.e. Agricultural-Industrial-Information, create and free-up resources for emerging industries, e.g. the Biotech Revolution. So, it seems, the U.S. is the most productive country by far (also, the second link shows roughly 75% of the world's top 200 Information-Age firms are American).




The French socialist government made a stupid mistake back in the early nineties when it thought that because of relatively high French productivity that they could lower the work week. This would supposedly "create more jobs".

The result was catastrophic as they lowered the work week from 39.5 hours to 35, a reduction of 11%. This effectively enshrined France's high unemployment for another decade - from which they are only beginning to exit.

France's hourly productivity is about as good as the US, but its global productivity (annual) is a sorry figure, because the French opted for more leisure and less industry.


"The de-emphasis on redistributive social policies only exacerbates the high levels of poverty and income inequality in the United States."

You said it.

For a country where 80% of the wealth goes to 20% of the population, and 40% goes to only 5%, it is a sad fact that the US ranks just ahead of Cuba by the World Health Organization in terms of purveying health services.

How can this be? Easy.

The WHO weighed very heavily the ability or a population to access health care in thier survey. And, of course, European countries, where health care is very heavily subsidized by the government, generally get better marks. The safety net is indeed wider.

So, for all the wealth being created by the American economy, one wonders why it is so chancy to survive birth there ... or why an education cannot be subsidized up to the university level. After all aren't health care and the intelligence of its citizens major requisites of a dynamic economy?


"Granted, the Europeans have more vacation time and less working hours, but I think there is a strong argument to be made that the higher levels of unemployment are too high relative to the leisure trade off."

Especially when those unemployed in ghettos think nothing of burning cars for amusement, then stoning the police and firemen who respond.

If beyond some level of income (in every nation) the marginal return of happiness of earning more money levels off very quickly, then surely society's objective (in terms of economic policy and wealth distribution) should be to concentrate on bringing as many people up to that level as possible.

Matt Festa


I do not deny that income inequality is a problem in the United States. However, I do not believe simple redistribution measures will do the trick. I would rather design policies along the lines of extensions of the EITC and subsidizing asset portfolio's among the poor.

There is also a case to be made that while the returns to higher education in the US is increasing (widening income inequality), the risk associated with higher education is increasing. Greg Mankiw uses the CAPAM model from finance to illustrate the point. an MBA degree has a high volatility in income. Take away the potential rewards beyond a certain point and watch more students opt out of obtaining one.

Thanks for the discussion of this complex problem.


Arthur Eckart

One difference between the poor in the U.S. and the poor in Third World countries is Americans have more choices. Americans place a high value on freedom (e.g. the Republicans winning both the House and Senate in '94, and maintained control ever since, after the Clinton Administration tried to make health care a government program). In practice, people in the U.S. who don't have health insurance have access to free health care, which is paid for by others. Perhaps, most Americans believe if you can't afford to have children, you shouldn't, although medical care is not denied. It's a value judgment. Individuals will maximize their utility. Many are unwilling to pay for health care, although those choices exist, because they value other goods more. Of course, the poor would accept a "free lunch," which isn't really free. It's uncertain if there's enough asymmetric information to support social engineering in health care. Also, studies have shown a school voucher system will increase the quantity and quality of education. Currently, parents who choose private schools for their children have to forego a free public education and pay the full cost of a private education.


Geraghty: "It has problems, just different ones from Europe."

Which problem would you prefer, a rate of 8 to 10% unemployment (since a quarter of a century) or 3 to 5%?

Europe's problems are infrastructural (i.e., regulatory).

Geraghty: " ... given slow wage growth and rising inequality over the last 3 decades."

I'll grant you willingly this remark. When 80% of the wealth cornered by 20% of the population and 40% by 5% of the population, one may characterize its political system as "plutocratic".

A plutocracy is easy to develop. You make sure that high-end tax rates are lowered such that the benefits in terms of enhanced disposable income supposedly "trickle down". Remember this inane reasoning justified by the Lafer Curve in the days of Reagonomics?

Then you make people believe that they can participate in the wealth generation by equity ownership. A nice 12 to 15% portfolio growth (in the nineties) does wonders for the "feel good factor". Of course, there will be those nasty problems of (unexpensed) stock options that make sure the larger part of the growth goes to a "select number" of insiders. Or, how about the pre-IPO stocks that were accorded to the fat-cats by the brokerage companies as enticements for contractual work? Or, very simply, how about Enron?

All the above just before/after the dot.com bubble burst.

These kinds of phenomena come from a society where the accumulation of wealth is a "given", meaning it is an act of God and therefore never to be questioned. It becomes a cultural attribute, that is, an external sign of success of the over-achievers.

Except for historical evidence that demonstrates that the concentration of financial power in the hands of a political class has most often proven to be disastrous for the nation as a whole. Of course, in a dynamic country like America, recent history is what happened five minutes ago and ancient history a hour ago.


Arthur Eckart

A Perla, I agree, many E.U. countries have severe structural problems, although perhaps the U.S. has a greater cyclical problem. Also, there was an article in the late '90s that 3,500 Microsoft employees became millionaires working for Microsoft (which is another example of income mobility). I'm sure there were many other employees who became millionaires in the high-tech bubble boom. A few employees at Microsoft, including the founders, became billionaires. This wealth was created rather than inherited. The Laffer Curve shows there's an optimal tax rate to maximize tax revenue, which make sense, although overly simplistic. When taxes are too low or too high, then tax revenue is suboptimal. Also, taxes need to be adjusted to economic conditions. Reagan cut taxes in the early '80s, which help fuel a strong economic expansion. Bush I raised taxes at the end of the expansion (which was the wrong time). Clinton raised taxes at the beginning of a new expansion (which was the right time), although failed to prevent the contraction (in particular reducing capital gains taxes and suspending the Alternative Minimum Tax). Bush II cut taxes at the right time, although failed to raise taxes when the expansion was well underway. Fiscal policy has shown to be far less flexible than monetary policy. U.S. income accounts only reflect the production side of the economy, which is understated, because U.S. consumer surplus, particularly goods for the poor, is large. The U.S. is not a system of a few rich landowners with a large number of poor. However, the U.S. poor has not done well compared to the middle and upper classes. Nonetheless, income inequality is relative.

Tom Geraghty

A Perla - I would prefer an economy with low unemployment and broadly distributed prosperity, which the US is not achieving now. I don't think there is necessarily a tradeoff between the two, at least not at the levels of inequality and worker insecurity that exist in the US now.

Your comment is deeply misleading - for most of the last 30 years the US unemployment rate has been much higher than 5%. Between 1974 and 1995 the average was nearly 7%. Since then the rate has been lower, but the employment-to-population ratio has actually fallen since 2000, and wages are not rising, so the current US unemployment rate is an overly optimistic indicator of the true state of the labor market.

Only between 1995 and 2000 was low unemployment combined with rising wages for the broad mass of the US population. Between the mid-70s and mid-90s, and again since 2000, all of the wage growth has gone to the top 20% of the income distribution.

Then, take into account the fact that Europeans enjoy more leisure time, better health indicators, greater economic mobility, better K-12 education systems, and greater economic security all-around. Which economy has the greater problems? It's certainly debateable and not nearly as clear-cut as this post and comments would suggest.

As for labor market regulations as the cause of Europe's problems, the evidence is mixed at best. As the EPI study points out, there are plenty of OECD economies that combine good employment performance with much stronger labor market protections than the US provides, from Scandinavia and the Netherlands to Ireland, the UK and Australia, suggesting there is plenty of room for the US to address its inequality problem without jeopardizing employment performance.

Arthur Eckart

Tom, if you look at gains on both the production and consumption sides, the U.S. has done better than the E.U. So, the implication is living standards are rising faster in the U.S. than in Europe. The U.S. economy has expanded more than the E.U., although the U.S. had large negative net exports (which lower GDP), and yet Americans consume more than produce. Also, U.S. real wage growth for lower income workers has not declined all the years you cited, while increases in benefits (not included in real wages) have increased substantially above the inflation rate. The unemployment rate in Europe has been consistently much higher than the U.S. So, I don't know how you can conclude Europeans have greater economic mobility, unless you're using more generous welfare programs, along with labor controls, which create structural unemployment. I would argue the U.S. generally has an excellent K-12 education system, although the disparity in quality, between schools, is greater than in Europe. I agree, Europeans have more leisure. However, most Americans love their jobs. I doubt there's much of a difference in health between Americans and Europeans.

Arthur Eckart

Also I may add, lower interest rates, lower taxes, deflation for many "low-end" products, etc. along with rising real wages and benefits, have helped low-skilled workers. Moreover, homeownership is at the highest level in U.S. history, with about two-thirds of U.S. households owning their own home.

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