The power of productivity

Everyone knows that the U.S. is richer than Europe. The conventional wisdom, however, holds that this is not because of better policies on our part, but rather than Americans work themselves to death while Europeans prefer to spend their time enjoying life and taking it easy.

I've never bought into this. According to today's Financial Times I am right to be skeptical:

One fact is indisputable. Over the past decade the US has stolen a march on its competitors so marked that it can no longer be dismissed as a statistical blip. Internationally comparable figures for 2005, published last week by Professor Bart van Ark's team at Groningen University in the Netherlands, demonstrated that last year sealed a decade of European and Japanese underperformance.

The trend had been obvious for some time before that. Europe's post-war catch-up with US living standards petered out in the 1970s, and the Americans have moved decisively ahead in the past decade. Japan sustained its relative improvement until 1991 but since then its decline has been rapid.

...The US has not always held so unassailable a lead. In the 1950s and 1960s, European per capita incomes steadily rose towards US levels, spurred on by the rapid recovery from the devastation of the second world war and the successful integration of European economies.

The former West Germany's per capita income increased from half the US level in 1950 to 89 per cent by 1976. Over the same period, France advanced from 57 per cent to 84 per cent; Italy from 40 per cent to 73 per cent and Spain from 27 per cent to 60 per cent. Only the UK failed to join the advancing European party; stuck with the "British disease" of poor labour relations, its per capita incomes grew in line with the US, hovering at about 77 per cent of US levels throughout the 1950s, 1960s and 1970s.

Japan also enjoyed a remarkable rise in its living standards, with its GDP per capita growing from 21 per cent of US levels in 1950 after the destruction of its economic infrastructure in the second world war, to 87 per cent in 1991, at the peak of the late 1980s Japanese property boom.

But the good times in Europe and Japan are long gone. In the past decade, the gap between US living standards and those in other leading countries widened again.

...Most of this difference is indeed a conscious choice. The decline in European weekly working hours has been a consistent feature since 1950. In the US, in contrast, hours worked stopped falling in the early 1980s and since then, while US citizens have become richer, they have not chosen to "buy" additional leisure time.

Europeans accept that lower incomes are the price of spending more time at home. If they worked US hours, Mr van Ark estimates, European GDP per capita would increase from 73 per cent of US levels to 86 per cent. The effect is particularly marked in the Netherlands, France, Germany and Austria.

A second drag on European living standards is the share of its population that is working. Unemployment dogs Germany, France and Italy and living standards are further dented because European economies are worse at getting the young into employment and keeping older people at work. For the 30 to 50 age group, there is almost no difference between the partici-pation rates of the US and Europe.

Weak labour markets depress average EU living standards relative to the US by another 5 percentage points; by 12 percentage points in France and by 7 percentage points in Germany.

But Europe's short-hours culture and higher unemployment levels are only part of the story. The real reason the region needs to worry is its labour productivity - output per hour worked - has begun to fall well behind the US's.

Average European labour productivity caught up with US levels in 1995, but since then it has declined by 10 per cent. Whereas between 1987 and 1995, the annual growth of the EU15's output per hour was 1.2 percentage points higher than the US, in the past decade, that trend has reversed and the US has enjoyed 1 percentage point a year faster labour productivity growth.

Of course, the second explanation -- high unemployment -- is a further product of their socialist policies. It always amazes me how some people can think that taxing the hell out of a country's citizens, regulating them like crazy and then giving them a welfare check is a sign of compassion.