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November 21, 2002

More on Productivity Slipperiness

Just a quick jump in with more on the productivity puzzle, which this
Economist article notes gets pretty tricky.

Look at this graph which shows three interesting things. Over the last decade, Europe had faster productivity growth early in the decade, while the US had greater productivity gains more recently.

Second, if you use alternative measures of growth, such as Net Domestic Product (excluding capital depreciation, considered a better measure by some), the differences between the US and Europe shrink significantly.

Third, for both the US and Europe, periods of fast productivity growth coincided with stagnant job growth.

And a few other key comments from the article:

"American statisticians count firms' spending on software as investment, so it contributes to final GDP. In the euro area, software is instead largely counted as a current expense, and so is excluded from final output. The surge in spending on software in the late 1990s therefore inflated America's growth rate relative to Europe's." (One reason the NDP measure was more accurate).
"One explanation for why productivity growth in Europe has slowed is that reforms to make labour markets more flexible have deliberately made GDP growth more job-intensive. More flexible workplace arrangements, such as part-time jobs and fixed-term contracts, have allowed firms to get around job-protection laws and so encouraged more hiring; cuts in social-security contributions for the low-paid have priced some of the jobless back into the labour market. The flip-side is lower average productivity growth, as more unskilled and inexperienced workers enter the workforce. "

This last point emphasizes that productivity measures are nice, but only when comparing similar labor markets. When the very structure of labor markets are changing, productivity numbers often have less to do with measuring innovation than whether speed-ups are being forced on workers or more workers are being brought into the workforce.

Posted by Nathan at November 21, 2002 09:32 AM

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Question. Why is unemployment so much higher in these countries? Not only is it higher, but it has been stubbornly higher and seems to be in a range of 9-11% with no hope of dropping.

Posted by: William Utley at November 30, 2002 10:36 AM

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