Dec. 10, 2003

The productivity slowdown in the EU has been widespread across industrial sectors, reports a new study just released by the European Commission. Since the mid 1990s, labor productivity growth in the EU has slowed in 45 out of 56 industrial sectors. In contrast, U.S. productivity has surged in half of these sectors.

The study was carried out for DG Enterprise of the European Commission, and conducted by the National Institute of Economic and Social Research (UK), the Groningen Growth and Development Centre (The Netherlands) and The Conference Board Europe (Brussels).

The findings suggest that strong productivity growth – a powerful sign of economic growth, health, and efficiency – is underway in the U.S. not only among information and communication technology (ICT) manufacturers, but also for major users of this technology, especially services. In the EU, only a small number of sectors that are producers or intensive users of ICT have experienced an improvement in productivity growth, and the acceleration is far less than achieved in the US.

The study provides a detailed account of labor productivity growth (1979-2001) in 56 industrial sectors, covering all EU Member States and the United States. It includes the contributions of capital and labor skills to productivity growth, and measures comparative levels of labor productivity in manufacturing industries. The study goes behind the aggregate trends to explain both the location of differences in productivity growth across countries and key reasons for these differences.
Can Europe Catch Up?

It may be that Europe is only temporarily lagging the U.S. and will soon begin to catch up. Like in the U.S., there is strong potential for the productive use of ICT in our manufacturing and service industries, but the institutional structure in Europe – especially product and labor market regulations – could slow the process by hindering European firms in reaping the benefits from new technology.
The study shows wide variation between sectors and across Member States. For example, two large Member States, Germany and Italy, account for much of the aggregate deceleration in total EU labor productivity growth in the late 1990s while half of the EU member countries have actually increased their contribution to productivity growth because of their growth in GDP.

The U.S. aggregate productivity advantage mainly stems from accelerating growth in the ICT intensive sectors, primarily services, which are not matched in the EU. These include such major sectors as retail trade, wholesale trade and financial securities, but other industries also show improvements. Both regions show declining growth in more traditional sectors that do not use ICT intensively.

In ICT-using sectors in Europe, there is much variation with the UK, the Netherlands and Spain showing accelerating growth from the mid-1990s but at rates much lower than experienced by the US. Some of the largest Member States, namely Germany, France and Italy, show a small decline across time in this group.

For the U.S. and four EU countries (France, Germany, the Netherlands and the UK), labor productivity growth is also broken down into contributions from ICT and non-ICT capital, labor quality and total factor productivity (TFP). Growth in ICT capital per hour worked (ICT capital deepening) was high in both the US and the EU-4. This was true for almost all sectors, including traditional industries.
Behind Europe?s Slowdown

The labor productivity slowdown in the European countries is significantly explained by decelerating contributions from non-ICT capital in most industries. This raises the question of whether wage moderation and greater integration of low-skilled labor has made capital relatively expensive, driving the EU into low-medium technology manufacturing.

In the 1980s, the U.S. rapidly increased its use of university-educated labor (the skill category most in demand in adopting and using ICT), although there are signs that demand for these skills has slowed in the 1990s. The available EU evidence suggests that utilization rates of graduates rose more in the 1990s, consistent with a lagged response in the EU to adopting this new technology.

The EU enjoys a unit cost advantage over the US in more traditional manufacturing industries, but low-wage countries are the main competitors for the EU (and the U.S.) in these sectors. Declining labor productivity growth in more traditional manufacturing is disturbing in the face of increased competition from low wage countries.

The study also examines the cyclical pattern of productivity growth, the pattern of change at the company level and several policy implications.

The report suggests that policies to strengthen product market competition may be worthwhile in some sectors, particularly in services. The importance of information technology in driving the U.S. acceleration suggests there are strong arguments in favor of providing general support to build up the EU knowledge base.

Editors – Mary O?Mahony and Bart van Ark. EU Productivity and Competitiveness: An Industry Perspective. Can Europe Resume the Catching-up Process? Published by the European Commission, Enterprise Publications, December 2003.

To download the report, please visit either The European Commission site or The Groningen Growth & Development Centre site.
Hard copies are available from the Commission's offices in London (+44 20 7973 1992) Brussels + 32 2 299 11 11 (central switchboard) or in any outlets that sell Commission publications.

SOURCE The Conference Board
Web Site: http://www.conference-board.org



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