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Welfare, Employment, Welfare, Employment, Productivity, and Policy Productivity, and Policy
Issues in the Comparison Issues in the Comparison of Europeof Europe
and the United Statesand the United StatesRobert J. GordonRobert J. Gordon
Northwestern University, NBER, CEPRNorthwestern University, NBER, CEPRIMF Institute, Washington, D.C.IMF Institute, Washington, D.C.
May 21, 2007May 21, 2007
What is Europe?What is Europe?
Throughout “Europe” refers to the Throughout “Europe” refers to the EU-15, not the EU-25EU-15, not the EU-25
Most of the first session compares Most of the first session compares EU-15 as a whole to the U. S.EU-15 as a whole to the U. S.
The second session divides up the EU-The second session divides up the EU-15 into country groups ordered by 15 into country groups ordered by post-1995 productivity growthpost-1995 productivity growth
Time periods: Session #1 entire Time periods: Session #1 entire postwar; Session #2 compares 1980-postwar; Session #2 compares 1980-95 vs. 1995-200595 vs. 1995-2005
Today’s Two SessionsToday’s Two Sessions
Session #1 Compares Europe and the U. S.Session #1 Compares Europe and the U. S. Income per Capita vs. ProductivityIncome per Capita vs. Productivity Hours per CapitaHours per Capita
Unemployment, LFPR, Hours per EmployeeUnemployment, LFPR, Hours per Employee Controversy about Policy, especially TaxesControversy about Policy, especially Taxes Comparisons of WelfareComparisons of Welfare
Extra leisure means less when unemployed or out of Extra leisure means less when unemployed or out of labor force, it isn’t all long vacationslabor force, it isn’t all long vacations
Role of extra household production in EuropeRole of extra household production in Europe Is all leisure more “enjoyable” than work?Is all leisure more “enjoyable” than work?
Does GDP Overstate U. S. Welfare?Does GDP Overstate U. S. Welfare?
After Break, Session #2After Break, Session #2 Focus on post-1995 EU TurnaroundFocus on post-1995 EU Turnaround
Productivity growth has slowed downProductivity growth has slowed down Employment per capita growth has speeded upEmployment per capita growth has speeded up
In which Industries has EU Productivity In which Industries has EU Productivity Faltered?Faltered?
Is there a Tradeoff between Employment Is there a Tradeoff between Employment and Productivity?and Productivity? Channels from policy and institutions to E/NChannels from policy and institutions to E/N Cultural changes in female LFPRCultural changes in female LFPR Contribution of employment turnaround to Contribution of employment turnaround to
productivity turnaroundproductivity turnaround Good news vs. bad news conclusionGood news vs. bad news conclusion
The Initial ComparisonsThe Initial Comparisons
UnemploymentUnemployment InflationInflation Comparative Levels of Output per Comparative Levels of Output per
CapitaCapita Comparative Levels of ProductivityComparative Levels of Productivity Comparative Levels of Hours per CapitaComparative Levels of Hours per Capita
The contribution of UnemploymentThe contribution of Unemployment The contribution of LFPRThe contribution of LFPR The contribution of Hours per EmployeeThe contribution of Hours per Employee
Relation of this SessionRelation of this Sessionto the Assigned Readingsto the Assigned Readings
Friday noon deadline for the Friday noon deadline for the Powerpoint you have in front of youPowerpoint you have in front of you
I did the readings over the weekend I did the readings over the weekend and have added a few extra slides and have added a few extra slides with comments on the readingswith comments on the readingsWhat Eichengreen, Alesina-Giavazzi, and What Eichengreen, Alesina-Giavazzi, and
Blanchard cover that I omitBlanchard cover that I omitAnd vice-versaAnd vice-versa
Red slides are not in your packageRed slides are not in your package
Unemployment Rates,Unemployment Rates,1996 and 20061996 and 2006
0 2 4 6 8 10 12 14 16 18 20
Spain
Finland
France
Ireland
Italy
Greece
Belgium
UK
Sweden
Portugal
Denmark
Netherlands
Euro Area
US
Inflation Rates (PCE Inflation Rates (PCE Deflator),Deflator),
1996 and 20061996 and 2006
0 1 2 3 4 5 6 7 8 9
Spain
Finland
France
Ireland
Italy
Greece
Belgium
UK
Sweden
Portugal
Denmark
Netherlands
Euro Area
US
What are the Substantive What are the Substantive Issues?Issues?
““Why is Europe so Productive yet so Poor?”Why is Europe so Productive yet so Poor?” If Y/H caught up but Y/N languished, then the If Y/H caught up but Y/N languished, then the
superficial Answer is H/N has been fallingsuperficial Answer is H/N has been falling Why?Why?
Blanchard (Blanchard (JEP, JEP, p. 4): “The main difference is that p. 4): “The main difference is that Europe has used some of the increase in Europe has used some of the increase in productivity to increase leisure rather than income, productivity to increase leisure rather than income, while the United States has done the opposite.” while the United States has done the opposite.”
Blanchard will be the straw man in this Blanchard will be the straw man in this discussion of more subtle interpretationsdiscussion of more subtle interpretations
An Opposing ViewAn Opposing View totoBlanchard’s “Taste for Blanchard’s “Taste for
Leisure”Leisure” The notation: Y/N ≡ Y/H * H/NThe notation: Y/N ≡ Y/H * H/N And: And: H/N ≡ H/E * E/L * L/NH/N ≡ H/E * E/L * L/N By definition the decline in Europe’s By definition the decline in Europe’s
Y/N related to Y/H can be divided into:Y/N related to Y/H can be divided into: Decline in relative H/E (35% 1960-95)Decline in relative H/E (35% 1960-95) Decline in relative E/N (65% 1960-95)Decline in relative E/N (65% 1960-95)
Voluntary Leisure?Voluntary Leisure? Some of decline in H/E is not voluntarySome of decline in H/E is not voluntary Most of decline in E/N is not voluntaryMost of decline in E/N is not voluntary
A Preview of the ChartsA Preview of the Charts
Comparison of Y/N and Y/H, how Comparison of Y/N and Y/H, how could Europe be so productive yet so could Europe be so productive yet so poor?poor?
Breakdown of H/N into E/N vs. H/EBreakdown of H/N into E/N vs. H/E Raw Numbers on E/N and H/ERaw Numbers on E/N and H/E E/L and L/N by AgeE/L and L/N by Age
Y/N since 1960: Europe Y/N since 1960: Europe Fails Fails
to Converge and then Falls to Converge and then Falls BehindBehind
1000
6000
11000
16000
21000
26000
31000
36000
1960 1965 1970 1975 1980 1985 1990 1995 2000
Europe - 15
United States
Productivity (Y/H) Post-Productivity (Y/H) Post-1960:1960:
The Ratio Reaches 96.9% in The Ratio Reaches 96.9% in 19951995
0
5
10
15
20
25
30
35
40
45
1960 1965 1970 1975 1980 1985 1990 1995 2000
Europe - 15
United States
The EU/US Ratios:The EU/US Ratios:Y/N compared to Y/HY/N compared to Y/H
40
50
60
70
80
90
100
110
1960 1965 1970 1975 1980 1985 1990 1995 2000
Output per hour
Output per capita
The Distinction between The Distinction between H/N, E/N vs. H/E H/N, E/N vs. H/E
60
70
80
90
100
110
120
130
1960 1965 1970 1975 1980 1985 1990 1995 2000
Hours per employee
Employee to population ratio
Output per capita tooutput per hour ratio
What the RecentWhat the RecentDebate has MissedDebate has Missed
The EU/US Ratio for Employment-The EU/US Ratio for Employment-Population turned around in 1995Population turned around in 1995
Why?Why? A reversal of labor market regulations?A reversal of labor market regulations? A reversal of product market A reversal of product market
regulations?regulations? A reversal of labor taxes?A reversal of labor taxes?
But the decline in hours/employee But the decline in hours/employee did not turn arounddid not turn around
Raw Numbers onRaw Numbers onHours per EmployeeHours per Employee
1400
1500
1600
1700
1800
1900
2000
2100
2200
1960 1965 1970 1975 1980 1985 1990 1995 2000
Europe - 15
United States
Employment per Capita:Employment per Capita: U.S. Women Marched Off U.S. Women Marched Off
to Work 1965-1990to Work 1965-1990
30%
35%
40%
45%
50%
55%
1960 1965 1970 1975 1980 1985 1990 1995 2000
Europe - 15
United States
Summary of Turnaround inSummary of Turnaround inE/N vs. H/EE/N vs. H/E
Table 1
Levels and Growth Rates of Three Ratios of Europe to the United States, 1960-2004, percent
Hours Hours Employees
per Capita per Employee per Capita
1960 119.8 102.4 115.9
1970 102.4 97.4 105.6
1995 73.6 87.1 85.7
2004 77.2 85.4 91.7
Annual
Growth Rates
1960-70 -1.6 -0.5 -0.9
1970-95 -1.3 -0.4 -0.8
1995-2004 0.5 -0.2 0.8
An Outline of Issues for An Outline of Issues for DiscussionDiscussion
Europe’s failure to converge is not just Europe’s failure to converge is not just a matter of voluntary vacationsa matter of voluntary vacations
Much more of the change 1960-95 was Much more of the change 1960-95 was the decline in employment per capitathe decline in employment per capita
Even lower hours are not entirely Even lower hours are not entirely voluntaryvoluntary ““If the French really wanted to work only If the French really wanted to work only
35 hours, why do they need the hours 35 hours, why do they need the hours police?”police?”
What Matters for Welfare is What Matters for Welfare is Y/NY/N
+ Differential Leisure, not + Differential Leisure, not Y/HY/H Europeans have “bought” their high Europeans have “bought” their high
productivity ratio with every conceivable productivity ratio with every conceivable way of making labor expensiveway of making labor expensive High marginal tax rates (payroll and income High marginal tax rates (payroll and income
taxes)taxes) UnionsUnions Firing restrictionsFiring restrictions Early retirement (55! 58!) with pensions paid Early retirement (55! 58!) with pensions paid
for by working peoplefor by working people Lack of encouragement of market involvement Lack of encouragement of market involvement
by teens and youthby teens and youth
The Decline in Europe’s E/N The Decline in Europe’s E/N Matters more than H/EMatters more than H/E
First, which age groups are suffering First, which age groups are suffering from higher unemployment in Europe?from higher unemployment in Europe?
Second, which age groups experience Second, which age groups experience lower labor force participation in lower labor force participation in Europe?Europe?
Third, how does it come together in the Third, how does it come together in the distribution of low E/N by age group?distribution of low E/N by age group?
Note: These graphs are for total Note: These graphs are for total population by age and blur population by age and blur male/female differences.male/female differences.
Unemployment by Age:Unemployment by Age:EU vs. US in 2002EU vs. US in 2002
0
5
10
15
20
25
15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74
Labor-force ParticipationLabor-force Participationby Ageby Age
0
10
20
30
40
50
60
70
80
90
15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74
Putting it Together:Putting it Together:Europe vs. US E/N by Age Europe vs. US E/N by Age
GroupGroup
0
10
20
30
40
50
60
70
80
90
15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74
Decomposing the EU/US Decomposing the EU/US Difference Difference
in the E/N Ratioin the E/N Ratio
age distribution unemployment LFPR E/N ratio
EU EU EU 87.14
US EU EU 86.19
EU US EU 91.23
EU EU US 97.11
US US EU 90.77
EU US US 102.1
Brief Summary of theBrief Summary of theRecent Prescott DebateRecent Prescott Debate
Prescott says it’s all higher taxes in EuropePrescott says it’s all higher taxes in Europe This is consistent with This is consistent with
Firms cutting jobsFirms cutting jobs Employees choosing untaxed leisureEmployees choosing untaxed leisure So decline in both H/E and E/N are involvedSo decline in both H/E and E/N are involved
Problems:Problems: Alesina, labor supply elasticities don’t matchAlesina, labor supply elasticities don’t match
The labor-supply elasticity for adult men is zeroThe labor-supply elasticity for adult men is zero The elasticity for females and teenagers is high, but The elasticity for females and teenagers is high, but
they are only half of the storythey are only half of the story Thus Prescott can explain only half of labor withdrawalThus Prescott can explain only half of labor withdrawal
Me, not consistent with age distribution storyMe, not consistent with age distribution story
Ljungqvist-Sargent’s skepticismLjungqvist-Sargent’s skepticismon the “national family”on the “national family”
Prescott assumes national family, Prescott assumes national family, voluntary redistribution to those who voluntary redistribution to those who withdraw labor because of high taxeswithdraw labor because of high taxes
In reality most of those who withdraw In reality most of those who withdraw labor supply because of high taxes are not labor supply because of high taxes are not supported by voluntary family transferssupported by voluntary family transfers
““Government expenditures are poor Government expenditures are poor substitutes for private consumption”substitutes for private consumption”
Yet by comparing EU vs US income Yet by comparing EU vs US income pre-taxpre-tax we’re equating one dollar of welfare we’re equating one dollar of welfare transfer to one dollar of market transfer to one dollar of market consumptionconsumption
Alesina on UnionsAlesina on Unionsand Regulationand Regulation
Contrast between U. S. and EUContrast between U. S. and EU U. S. union penetration peaked in late U. S. union penetration peaked in late
30s, 1940s, declined after 1950s30s, 1940s, declined after 1950s Europe peaked in late 1970s, early Europe peaked in late 1970s, early
1980s1980s No disagreement about what unions No disagreement about what unions
do to the labor supply and demand do to the labor supply and demand diagramsdiagrams Unions push the economy northwestUnions push the economy northwest
Channels of European Channels of European Union Influence (Alesina)Union Influence (Alesina)
Unions keep wages artificially highUnions keep wages artificially high Unions may pursue a political agenda to Unions may pursue a political agenda to
reduce work hoursreduce work hours Unions have pushed for early retirement Unions have pushed for early retirement
financed by state pensionsfinanced by state pensions Unions impede the reallocation of labor in Unions impede the reallocation of labor in
response to sectoral shocksresponse to sectoral shocks
Neither Alesina nor critics notice Neither Alesina nor critics notice turnaround in Europe’s E/N after 1995turnaround in Europe’s E/N after 1995
Critique of Modern MacroCritique of Modern MacroInterpretationsInterpretations
About Alesina, timing is wrong. About Alesina, timing is wrong. Union density increased 1960-80, Union density increased 1960-80, but then fell to 1995 to about the but then fell to 1995 to about the same level as 1960same level as 1960
This argument from Rogerson (2006) This argument from Rogerson (2006) ignores inertia in political processignores inertia in political process
Decline in unions and decline in Decline in unions and decline in taxes consistent with post-1995 taxes consistent with post-1995 turnaround in H/Nturnaround in H/N
Reactions of Hours to Reactions of Hours to TaxesTaxes
Regressions of H/N on tax wedgeRegressions of H/N on tax wedge Using H/N is a first approximation, need to study Using H/N is a first approximation, need to study
separate effects on E/N and H/Eseparate effects on E/N and H/E Double-log specification, estimated elasticity Double-log specification, estimated elasticity
of H/N to tax wedge is -0.4of H/N to tax wedge is -0.4 Changes after 1995 don’t match the tax Changes after 1995 don’t match the tax
changes very well, but they go in the right changes very well, but they go in the right directiondirection
Middle countries are the exceptionMiddle countries are the exception While everybody else was increasing H/N, While everybody else was increasing H/N,
middle countries were working less – counter middle countries were working less – counter to tax storyto tax story
Is the Glass Half-FullIs the Glass Half-Fullor Half-Empty?or Half-Empty?
Recent Reports by the OECD and others join Recent Reports by the OECD and others join together high unemployment and slow together high unemployment and slow productivity growth as part of a general productivity growth as part of a general malaise.malaise.
Our focus is differentOur focus is different Labor market and tax reforms have raised Labor market and tax reforms have raised
hours per capita after three decades of decline.hours per capita after three decades of decline. Rising hours per capita and declining growth of Rising hours per capita and declining growth of
output per hour are signs of victory for output per hour are signs of victory for European labor market reforms, not signs of European labor market reforms, not signs of defeat.defeat.
A Broader View:A Broader View:The Welfare Cost of HigherThe Welfare Cost of Higher
UnemploymentUnemployment
The distinction between marginal The distinction between marginal hours of leisure (40 work, 80 leisure) hours of leisure (40 work, 80 leisure) vs. inframarginal hours (20 work, 100 vs. inframarginal hours (20 work, 100 leisure)leisure)
Leisure hours on vacations and Leisure hours on vacations and weekends are more valuable than weekends are more valuable than mid-week leisure hoursmid-week leisure hours Apply analysis to unemploymentApply analysis to unemployment Apply analysis to early retirementApply analysis to early retirement
The Welfare Effect of EarlyThe Welfare Effect of EarlyRetirement: Back-of-Retirement: Back-of-
EnvelopeEnvelope Baseline: work age 20-65, retire 65-84Baseline: work age 20-65, retire 65-84 No saving, investmentNo saving, investment 30% tax finances pay-as-you-go pensions 30% tax finances pay-as-you-go pensions
with balanced govt budgetwith balanced govt budget Tax finances equality of consumption in Tax finances equality of consumption in
retirement to consumption during work yearsretirement to consumption during work years Alternative retirement age at 55 requires Alternative retirement age at 55 requires
tax increase to 45.6%, 25.1% decline in tax increase to 45.6%, 25.1% decline in consumption during work years and consumption during work years and retirementretirement
Welfare calculationWelfare calculation
With 55 retirement age, after-tax wage With 55 retirement age, after-tax wage is 25% lessis 25% less
Extra hours switched from work to Extra hours switched from work to retirement leisure are low-valued (2/3)retirement leisure are low-valued (2/3)
Total welfare = market consumption Total welfare = market consumption plus total value of leisure plus total value of leisure
Market consumption declines 25.1 Market consumption declines 25.1 percent, welfare declines 22.6 percent, percent, welfare declines 22.6 percent, ratio 90% (i.e., leisure offsets 10%)ratio 90% (i.e., leisure offsets 10%)
Some Time of Unemployed Some Time of Unemployed is Spentis Spent
In Home Production not In Home Production not LeisureLeisure
Freeman-SchettkatFreeman-Schettkat M=market, H=home production, M=market, H=home production,
L=leisure, P=personal time (sleep)L=leisure, P=personal time (sleep) I set P>9.0 as LeisureI set P>9.0 as Leisure
M H L PM H L P
Employed 8.0 2.5 4.5 9Employed 8.0 2.5 4.5 9
Unemployed 1.0 4.5 9.5 9Unemployed 1.0 4.5 9.5 9
Some Time of Unemployed is Some Time of Unemployed is SpentSpent
In Home Production not LeisureIn Home Production not Leisure Freeman-Schettkat, Freeman-Schettkat, Economic PolicyEconomic Policy, ,
January 2005January 2005 M=market, H=home production, L=leisure, M=market, H=home production, L=leisure,
P=personal time (sleep)P=personal time (sleep) I set P>9.0 as LeisureI set P>9.0 as Leisure
MenMen WomenWomen
M H L P M H L PM H L P M H L P
US 1992 6.3 2.3 6.3 9 4.1 4.3 6.2 9US 1992 6.3 2.3 6.3 9 4.1 4.3 6.2 9
EU early 90s 6.2 1.9 6.8 9 3.0 5.8 6.3 9EU early 90s 6.2 1.9 6.8 9 3.0 5.8 6.3 9
Turn the Tables on the U. Turn the Tables on the U. S.:S.:
The “Disconnect” between The “Disconnect” between Welfare and PPP-Adjusted Welfare and PPP-Adjusted
GDPGDP GDP Exaggerates U. S. GDP per CapitaGDP Exaggerates U. S. GDP per Capita
Extreme climate, lots of air conditioning, Extreme climate, lots of air conditioning, low petrol prices, huge excess energy uselow petrol prices, huge excess energy use
U. S. urban sprawl: energy use, congestionU. S. urban sprawl: energy use, congestion Crime, 2 million in prisonCrime, 2 million in prison Insecurity, lack of employment protection, Insecurity, lack of employment protection,
lack of citizen’s right to medical carelack of citizen’s right to medical care How much is this worth?How much is this worth?
BTUs per GDP:BTUs per GDP:The EU-US Difference The EU-US Difference
is only 2% of GDPis only 2% of GDP
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
1980 1985 1990 1995 2000
Other Additions or Other Additions or Subtractions Subtractions
from Europe’s Welfarefrom Europe’s Welfare Urban Congestion? Urban Congestion?
London vs. NY? Paris vs. Chicago?London vs. NY? Paris vs. Chicago? Time spent in London underground vs. in Time spent in London underground vs. in
a Chicago automobile?a Chicago automobile? Prisons, perhaps 1% of GDPPrisons, perhaps 1% of GDP Inefficiency of U.S. Medical Care Inefficiency of U.S. Medical Care Undeniable U. S. superiority: housingUndeniable U. S. superiority: housing
People value interior square feet (2X in People value interior square feet (2X in US)US)
People value exterior land (4X in US)People value exterior land (4X in US)
The Value of ExtraThe Value of ExtraSecurity in EuropeSecurity in Europe
By Measuring Y/N Pre-tax instead of Post-By Measuring Y/N Pre-tax instead of Post-Tax, we treat EU Welfare System as Valuable Tax, we treat EU Welfare System as Valuable as Equivalent in Market Consumptionas Equivalent in Market Consumption
Prescott counts only the substitution effects Prescott counts only the substitution effects of higher labor taxesof higher labor taxes
Europeans get full value back per tax dollar Europeans get full value back per tax dollar in valued government servicesin valued government services U comp, maternity leave, pensions, severance payU comp, maternity leave, pensions, severance pay
To Make an extra allowance would be double To Make an extra allowance would be double countingcounting
Additional SubtletiesAdditional Subtleties
Immigration?Immigration? U.S. Illegal but VoluntaryU.S. Illegal but Voluntary Illegal Immigrants have jobsIllegal Immigrants have jobs Alienated French Alienated French banlieuesbanlieues European immigrants more political than European immigrants more political than
economic?economic? InequalityInequality
U. S. median real income grows slower than U. S. median real income grows slower than mean real income, increasing skewness of mean real income, increasing skewness of income distributionincome distribution
Table 3
Summary of Adjustments to the Europe-to-U.S. Ratio of Per-capita Income, 2004
Europe-to-U. S. Adjustment toAdjustment
to
Ratio of Real GDP per
CapitaLeisure Component of
Hours GDP
Market PPP Ratio of Y per Capita 68.8
Add: 2/3 of Difference
in Hours per Employee (11.8) 7.9
Add: 1/10 of Difference
in Employment per Capita (8.6) 0.9
Add: Half of Energy Use Difference 1.0
Add: Prisons and Other 1.0
Add: Medical Care Inefficiency 3.0
Sum of Market PPP Ratio and
above Additions 82.6
Market PPP Ratio of Y per Hour 89.2
Percent Prody Gap Explained 67.6
Percent Total Gap Explained 44.2
To Conclude Session #1,To Conclude Session #1,Let’s Look at ReadingsLet’s Look at Readings
Eichengreen, substantial overlapEichengreen, substantial overlap His “MIT School” vs. “Minnesota School”His “MIT School” vs. “Minnesota School” U. S. medical care, prisons, doesn’t mention energyU. S. medical care, prisons, doesn’t mention energy His med care emphasis more on security, mine His med care emphasis more on security, mine
more on administrative inefficiencymore on administrative inefficiency He places more emphasis on inequality, and I He places more emphasis on inequality, and I
should have also. Growth in US median wage should have also. Growth in US median wage much slower than average wagemuch slower than average wage
He misses post-1995 turnaround in E/N and He misses post-1995 turnaround in E/N and the distinction between leisure and home the distinction between leisure and home productionproduction
Eichengreen Chapter 13Eichengreen Chapter 13
Europe’s Institutions well-suited for 1945-73 Europe’s Institutions well-suited for 1945-73 catching up, but not for innovation needed nowcatching up, but not for innovation needed now
US higher education, synergy with research US higher education, synergy with research labslabs
US role in development of computer hardware, US role in development of computer hardware, software, fueled by venture capitalsoftware, fueled by venture capital
Too much techno-pessimism, US productivity Too much techno-pessimism, US productivity growth is slowing downgrowth is slowing down
Will Europe catch up in retailing and services?Will Europe catch up in retailing and services?
Alesina-GiavazziAlesina-Giavazzi Excellent section on sociological history, Excellent section on sociological history,
why US never developed Marxian parties or why US never developed Marxian parties or attitudesattitudes Self-selected immigrants believed they would get Self-selected immigrants believed they would get
aheadahead Lure of the frontier, free landLure of the frontier, free land Winner-take-all Constitution prevents growth of Winner-take-all Constitution prevents growth of
small partiessmall parties Legal prevention of union organization until Legal prevention of union organization until
1930s1930s Fundamentally different attitudes toward Fundamentally different attitudes toward
taxation, welfare, and inequalitytaxation, welfare, and inequality How much would this change in a Democratic How much would this change in a Democratic
Administration?Administration?
Blanchard on UnemploymentBlanchard on Unemployment
Emphasizes big increase in U duration in Emphasizes big increase in U duration in FranceFrance ““Unemployment has always been a very different Unemployment has always been a very different
experience in the US compared to Europe”experience in the US compared to Europe” Focuses on move to early retirement in Focuses on move to early retirement in
France between 1968 and early 1980sFrance between 1968 and early 1980s Agrees that change in H/N must be divided Agrees that change in H/N must be divided
between H/E, E/L, and L/Nbetween H/E, E/L, and L/N Partly misses post-1995 turnaround but does Partly misses post-1995 turnaround but does
point to increased heterogeneity in Europepoint to increased heterogeneity in Europe
More BlanchardMore Blanchard
His “vicious circle,” high unemployment His “vicious circle,” high unemployment leads to destruction of human and physical leads to destruction of human and physical capitalcapital
Emphasizes ambiguous effects of Emphasizes ambiguous effects of employment protection legislation. employment protection legislation. Reduces labor market flows but also Reduces labor market flows but also employer incentives to hire.employer incentives to hire.
His comparison of Spain vs. Portugal, a His comparison of Spain vs. Portugal, a preview of the big role of Spain in Session preview of the big role of Spain in Session #2 to come#2 to come
Session #2:Session #2:Is There an Employment-Is There an Employment-
Productivity Tradeoff?Productivity Tradeoff? Two marked events in Europe after 1995Two marked events in Europe after 1995
Slowdown in productivity growth to well below the Slowdown in productivity growth to well below the U. S. rateU. S. rate
Increase in growth of employment per capita at Increase in growth of employment per capita at well above the U. S. ratewell above the U. S. rate
Are these connected causally or just a Are these connected causally or just a coincidence?coincidence? Which way does the causation go?Which way does the causation go?
Co-authored with Ian Dew-BeckerCo-authored with Ian Dew-Becker Look him up on googleLook him up on google
Ian in SF, you can’t see Ian in SF, you can’t see “MV=PY”“MV=PY”
The US Accelerates,The US Accelerates,Europe DeceleratesEurope Decelerates
From 1950 to 1995 EU productivity growth was From 1950 to 1995 EU productivity growth was faster than in the USfaster than in the US
But in the past decade since 1995 we have But in the past decade since 1995 we have witnessedwitnessed An explosion in US productivity growthAn explosion in US productivity growth A slowdown in EU productivity growth roughly equal A slowdown in EU productivity growth roughly equal
in sizein size An explosion in research on the US takeoff and but An explosion in research on the US takeoff and but
much less research on Europe’s slowdownmuch less research on Europe’s slowdown The magnitude of the shift (average EKS&GK The magnitude of the shift (average EKS&GK
Groningen)Groningen) EU/US level of labor productivity (ALP)EU/US level of labor productivity (ALP) 1979 1979 1995 1995 20042004
80%80% 97%97% 89%89%
Point of Departure: Post-95 Point of Departure: Post-95
Turnaround Plus New Turnaround Plus New HeterogeneityHeterogeneity This paper begins with two simple This paper begins with two simple
observations:observations:1. While European productivity (Y/H) has fallen 1. While European productivity (Y/H) has fallen
back since 1995 relative to the US, output per back since 1995 relative to the US, output per capita (Y/N) has not fared nearly as badlycapita (Y/N) has not fared nearly as badly
►►Y/H growth gap: .9%Y/H growth gap: .9%►►Y/N growth gap: .2%Y/N growth gap: .2%
2. After 1995, we see divergence across the 2. After 1995, we see divergence across the EU-15 in Y/H growthEU-15 in Y/H growth
► ► St. Dev. 1970-1995: 0.62St. Dev. 1970-1995: 0.62► ► St. Dev. 1995-2005: 1.01St. Dev. 1995-2005: 1.01
The Key Identity SuggestsThe Key Identity Suggeststhe Tradeoffthe Tradeoff
An identity links Y/N and Y/H to H/N:An identity links Y/N and Y/H to H/N:Y/N = Y/H * H/NY/N = Y/H * H/N
Thus the paradox of high European Y/H and low Y/N Thus the paradox of high European Y/H and low Y/N must be resolved by lower H/Nmust be resolved by lower H/N
Also, Y/H and H/N are jointly determinedAlso, Y/H and H/N are jointly determined The task of this paper is going to be figure The task of this paper is going to be figure
out which direction the causation runsout which direction the causation runs We will argue that a good deal of the decline in We will argue that a good deal of the decline in
ALP growth is due to exogenous employment ALP growth is due to exogenous employment shocksshocks
Also we will highlight the reversal of almost Also we will highlight the reversal of almost everything at 1995, comparing 1970-95 vs. 1995-everything at 1995, comparing 1970-95 vs. 1995-20052005
Bringing Together the Bringing Together the Disparate LiteraturesDisparate Literatures
Literature #1, why did Europe’s hours per capita Literature #1, why did Europe’s hours per capita (hereafter H/N) decline before 1995? Prescott, (hereafter H/N) decline before 1995? Prescott, Rogerson, Sargent-Lundqvist, Alesina, BlanchardRogerson, Sargent-Lundqvist, Alesina, Blanchard High taxes, regulations, unions, high minimum wagesHigh taxes, regulations, unions, high minimum wages Europe made labor expensiveEurope made labor expensive Movement up Labor Demand curve => low Movement up Labor Demand curve => low
employment + high ALPemployment + high ALP Literature #1 has missed the turnaroundLiterature #1 has missed the turnaround
Since 1995 there has been a decline in tax rates and Since 1995 there has been a decline in tax rates and employment protection measures; unionization earlieremployment protection measures; unionization earlier
Big increase in hours per capita, turnaround in both Big increase in hours per capita, turnaround in both absolute terms and relative to the US Move back absolute terms and relative to the US Move back down Ldown LDD curve curve
Textbook Labor Textbook Labor EconomicsEconomics
-2
-1
0
1
2
3
4
5
6
7
1 2 3 4 5 6 7 8 9 10 11
Labor Input
Re
al W
ag
e
Labor Demand Curve
High-Cost LaborSupply Curve
Low-Cost LaborSupply Curve
(W/P)0
(W/P)1
N0 N1
Downward shift in labor supply curve reduces real wage and productivity
A
B
Pre-1995: Moving Pre-1995: Moving NorthwestNorthwest
1970-95 EU climbs to the northwest1970-95 EU climbs to the northwest Hours per capita decline, average labor Hours per capita decline, average labor
productivity increasesproductivity increases In this sense much of Europe’s 1970-95 In this sense much of Europe’s 1970-95
productivity catchup was “artificial,” productivity catchup was “artificial,” propelled by policies making labor propelled by policies making labor expensiveexpensive No busboys, grocery baggers, valet parkersNo busboys, grocery baggers, valet parkers Product regulations kept stores shut tight Product regulations kept stores shut tight
many hours of the day/nightmany hours of the day/night All this reduced Europe’s employment share All this reduced Europe’s employment share
in retail/services in retail/services
Post-1995: Moving Post-1995: Moving SoutheastSoutheast
1995-2004 EU slides southeast1995-2004 EU slides southeast Hours per capita start increasing while they Hours per capita start increasing while they
decline in the USdecline in the US Effects are magnified by slow reaction of Effects are magnified by slow reaction of
capital, eventually capital should grow faster capital, eventually capital should grow faster offsetting much or all of productivity slowdownoffsetting much or all of productivity slowdown
Literature #1 misses the turnaroundLiterature #1 misses the turnaround Since 1995 decline in tax rates and Since 1995 decline in tax rates and
employment protection measuresemployment protection measures We are unaware of much macro-level research We are unaware of much macro-level research
on the turnaround in hourson the turnaround in hours Allard and Lindert (2006) do not really Allard and Lindert (2006) do not really
mention it – data only goes to 2001mention it – data only goes to 2001
Literature #2: The EU-US Literature #2: The EU-US ALP gapALP gap
Central Focus of Lit #2 on post-1995 Central Focus of Lit #2 on post-1995 turnaround in US Productivity Growthturnaround in US Productivity Growth Jorgenson, Ho and Stiroh (2006): ’95-’00 Jorgenson, Ho and Stiroh (2006): ’95-’00
due to ICT, ’00-’05 something elsedue to ICT, ’00-’05 something else Retail is often notedRetail is often noted
Van Ark, Inklaar and McGuckin (2003)Van Ark, Inklaar and McGuckin (2003) Foster, Haltiwanger and Krizan (2002) on Foster, Haltiwanger and Krizan (2002) on
new establishmentsnew establishments Baily and Kirkegaard (2004) on Baily and Kirkegaard (2004) on
regulationsregulations Need to free land use restrictionsNeed to free land use restrictions
Fully 85% of EU productivity slowdown Fully 85% of EU productivity slowdown has its counterpart in a speed-up of EU has its counterpart in a speed-up of EU H/NH/N Europe paid for lower ALP mainly with Europe paid for lower ALP mainly with
higher hours rather than less consumptionhigher hours rather than less consumption Saltari and Travaglini have made a similar Saltari and Travaglini have made a similar
point with respect to Italypoint with respect to Italy This runs counter to the Blanchard This runs counter to the Blanchard
story about preferences for leisurestory about preferences for leisure Now we hear that they’re not lazy, just Now we hear that they’re not lazy, just
unproductiveunproductive Huge literature on different structural Huge literature on different structural
reasons for EU sclerosisreasons for EU sclerosis
Literature #3: relationship Literature #3: relationship between Y/H and H/Nbetween Y/H and H/N
There is a long line of research examining There is a long line of research examining the relationship between hours and the relationship between hours and productivityproductivity
Even using an IV approach, increases in Even using an IV approach, increases in H/N drive down Y/HH/N drive down Y/H This makes sense in a single factor model or This makes sense in a single factor model or
with any slow adjustment of capitalwith any slow adjustment of capital Measuring the speed of adjustment of Measuring the speed of adjustment of
investment is difficult – future research for usinvestment is difficult – future research for us View today’s talk as a report on research in View today’s talk as a report on research in
progress, not the final polished wordprogress, not the final polished word
Figure 1. Trends in Output per Hour, Output, and Hours,
U.S. and EU, Anual Growth Rates, 1970-2005
0
1
2
3
4
5
6
1970 1975 1980 1985 1990 1995 2000 2005
Per
cen
t
E.U. Output per Hour
U.S. Output per Hour
Interpreting the Post-1995 Interpreting the Post-1995 TurnaroundTurnaround
Simple HP trendsSimple HP trends Europe is continuing its long slow declineEurope is continuing its long slow decline Turnaround is generally pegged at 1995Turnaround is generally pegged at 1995
The EU-15 stops catching up, and the US The EU-15 stops catching up, and the US takes offtakes off
We are mainly going to examine the We are mainly going to examine the determinants of the turnaround – i.e. determinants of the turnaround – i.e. changes in Y/H growth post-1995changes in Y/H growth post-1995
Qualification: US trend peaks in 2002-03 Qualification: US trend peaks in 2002-03 and is now decliningand is now declining
New US Productivity Trends New US Productivity Trends BasedBased
on March 2007 Quarterly on March 2007 Quarterly DataData
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
NFPB LP
Total economy LP
Difference
-2
-1
0
1
2
3
4
1970 1975 1980 1985 1990 1995 2000 2005
Pe
rce
nt
US Output per CapitaEU-15 Output per Capita
EU-15 Hours per Capita
US Hours per Capita
We Need to Look at We Need to Look at EverythingEverythingPer CapitaPer Capita
Population growth in EU 0.7 percent per Population growth in EU 0.7 percent per year slower than US over the past year slower than US over the past decadedecade
Output per capita in the EU doesn’t look Output per capita in the EU doesn’t look bad at allbad at all
Post-1995 hours turnaround is a Post-1995 hours turnaround is a counterpart to the Y/H turnaroundcounterpart to the Y/H turnaround
We will see that there is a similar pattern We will see that there is a similar pattern withinwithin the EU – strong negative the EU – strong negative correlation between the hours and ALP correlation between the hours and ALP turnaroundsturnarounds
-2
-1
0
1
2
3
4
5
6
7
1984 1988 1992 1996 2000 2004
US Hours
US CapitalEU Capital
EU Hours
The US has experienced an enormous The US has experienced an enormous decline in hours growth when capital decline in hours growth when capital growth fellgrowth fell Thus “capital-deepening” numbers for US Thus “capital-deepening” numbers for US
are misleading as they reflect as much are misleading as they reflect as much movements in the denominator as in the movements in the denominator as in the numerator.numerator.
Cumulative hours growth zero 2000-06, Cumulative hours growth zero 2000-06, growth in hours per capita negativegrowth in hours per capita negative
The EU had strong hours growth while The EU had strong hours growth while the US went through its recession and the US went through its recession and recoveryrecovery
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
1984 1988 1992 1996 2000 2004
US TFP
EU TFP
Defining Tigers and Defining Tigers and Tortoises, Tortoises,
Pop Shares and Private ALP Pop Shares and Private ALP GrowthGrowth
Tigers: Ireland, Finland, GreeceTigers: Ireland, Finland, Greece Pop Share: 5%Pop Share: 5% ALP 4.79%ALP 4.79%
Middle: Sweden, Austria, UK, Middle: Sweden, Austria, UK, Germany, Portugal, FranceGermany, Portugal, France Pop Share: 61%Pop Share: 61% ALP: 2.45%ALP: 2.45%
Tortoises: Belgium, Netherlands, Tortoises: Belgium, Netherlands, Denmark, Luxembourg, Spain, ItalyDenmark, Luxembourg, Spain, Italy Pop Share: 34%Pop Share: 34% ALP: 0.72% ALP: 0.72%
1970-1995 1995-2005 Difference 1970-1995 1995-2005 Difference 1970-1995 1995-2005 Difference
US 1.42 2.30 0.88 0.55 -0.14 -0.69 1.97 2.15 0.18EU 2.89 1.40 -1.49 -0.80 0.55 1.35 2.09 1.95 -0.14Tigers 2.93 2.95 0.02 -0.67 1.22 1.89 2.26 4.17 1.91Middle 2.80 1.86 -0.94 -0.84 -0.08 0.76 1.96 1.78 -0.19Tortoises 3.05 0.39 -2.66 -0.75 1.59 2.34 2.30 1.98 -0.32
Growth RatesGrowth RatesGrowth RatesProductivity Hours per Capita Output per Capita
We break the EU-15 into three groups based on post-’95 Y/H growth: Tigers: Ireland, Finland and Greece Middle Countries: Sweden, Austria, UK, Germany,
Portugal and France Tortoises: BeNeLux, Denmark, Spain and Italy
A closer look at the TortoisesA closer look at the Tortoises
Mainly driven by Spain and ItalyMainly driven by Spain and Italy
Spain:Spain:
►►-4.44% turnaround in Y/H-4.44% turnaround in Y/H
►►+5.01%+5.01% turnaround in H/N turnaround in H/N
Italy:Italy:
►►-2.25%-2.25% turnaround in Y/Hturnaround in Y/H
►►+1.08% turnaround in H/N+1.08% turnaround in H/N Had we ranked the countries Had we ranked the countries
according to output per capita, Spain according to output per capita, Spain would be a Tiger would be a Tiger
Figure 2. Private Economy Labor Productivity Growth by Country: 1979-1995, 1995-2003
1995-20031979-1995
0 1 2 3 4 5 6 7 8 9
Italy
Spain
Luxembourg
Denmark
Netherlands
Belgium
France
Portugal
Germany
United Kingdom
Austria
Sweden
Greece
Finland
IrelandTigers
Middle
TortoisesPre-1995
Post-1995
Making Sense of Cross-EUMaking Sense of Cross-EUHeterogeneityHeterogeneity
Notice the homogeneity pre-1995 and Notice the homogeneity pre-1995 and heterogeneity post-’95heterogeneity post-’95
The only two countries with a noticeable The only two countries with a noticeable acceleration are Greece and Irelandacceleration are Greece and Ireland
Sweden a bit up and UK a bit downSweden a bit up and UK a bit down Sharp declines for France, Portugal, and Sharp declines for France, Portugal, and
all the Tortoisesall the Tortoises For most of the remainder of the paper, we For most of the remainder of the paper, we
focus only on the middle countries and focus only on the middle countries and tortoisestortoises The tigers are special cases – they do not The tigers are special cases – they do not
provide any policy lessons for the rest of the EUprovide any policy lessons for the rest of the EU
The New Results in thisThe New Results in thisPaper at the Industry LevelPaper at the Industry Level
We aggregate productivity growth by We aggregate productivity growth by industry in a way that allows us to determine industry in a way that allows us to determine the relative role of productivity and sharesthe relative role of productivity and shares
The “productivity” effect is just the difference The “productivity” effect is just the difference in productivity growth in a given industryin productivity growth in a given industry
The “share” effect is the addition or The “share” effect is the addition or subtraction from growth as shares shift subtraction from growth as shares shift within industries.within industries. Example: Ireland shifts to high tech Example: Ireland shifts to high tech
manufacturing, this comes out as a “share” effect manufacturing, this comes out as a “share” effect within manufacturingwithin manufacturing
Contributions, Productivity vs. Contributions, Productivity vs. Share Effects, in EU-US, 1995-Share Effects, in EU-US, 1995-
20032003
-0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2
Farms/mining
Const./utilities
Manufacturing
Retail/wholesale
Trans.
Finance
Serv.
Comm.
Real estate
ProdShare
Non-ICT share
Non-durables share
Non-ICT prodICT prod
Non-durables prod
ICT share
Manufacturing is nearly as importantas retail
But ICT is tinyOnly ~2% hours share
ALP growth multiplied by nominal sharesALP growth multiplied by nominal shares
-0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5
Real Estate
Communications
Services
Finance
Transportation
Retail/Wholesale
Manufacturing
Construction Utilities
Farms/Mining
U.S.
E.U.
US acceleration is widespread, not just in retailand manufacturing.
EU weakness is also widespread
Tortoises vs. MiddleTortoises vs. Middle
-0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1
Farms/mining
Const./utilities
Manufacturing
Retail/wholesale
Trans.
Finance
Serv.
Comm.
Real estate
Share
Prod
Failure is more widespread.Totally unrelated industries account for the declineNote that this is largely driven by productivity, not share effects
Interpreting the TortoiseInterpreting the TortoiseProblem after 1995Problem after 1995
Failure is across the boardFailure is across the board Consistent with basic theme of paper, that there Consistent with basic theme of paper, that there
is a macro causeis a macro cause How much due to a reduction in taxes and in How much due to a reduction in taxes and in
regulations?regulations? How much remains for an exogenous decline in TFP How much remains for an exogenous decline in TFP
growth?growth? Understanding Share EffectsUnderstanding Share Effects
ICT Share higher in US vs EU and also middle vs ICT Share higher in US vs EU and also middle vs tortoisestortoises
Big EU share deficit in retail/wholesale and services, Big EU share deficit in retail/wholesale and services, consistent with high tax storyconsistent with high tax story
Part of Tiger success is moving resources, out of Part of Tiger success is moving resources, out of agriculture for Greece and Ireland, into ICT mfg agriculture for Greece and Ireland, into ICT mfg for Ireland and Finlandfor Ireland and Finland
Research StrategyResearch Strategy
Divergence across the EU has Divergence across the EU has increasedincreased
The Y/H slowdown in the tortoises in The Y/H slowdown in the tortoises in most countries is balanced by most countries is balanced by healthy H/N growthhealthy H/N growth
We are going to then try to break We are going to then try to break down the determinants of the down the determinants of the middle-tortoise gap in Y/H growth middle-tortoise gap in Y/H growth and relate it to H/N growthand relate it to H/N growth
Qualification: We’re NotQualification: We’re NotDealing with Capital Dealing with Capital
AdjustmentAdjustment ALP Growth = ALP Growth =
ΔΔlabor qualitylabor quality+ + ΔΔcapacity utilizationcapacity utilization+ capital deepening+ capital deepening+ TFP+ TFP
We focus for now on capital deepeningWe focus for now on capital deepening Simple one-factor framework based on the textbook Simple one-factor framework based on the textbook
labor demand curve with fixed capitallabor demand curve with fixed capital Making capital adjustment endogenous next on our Making capital adjustment endogenous next on our
agendaagenda Also next on agenda is tracing link from policy changes Also next on agenda is tracing link from policy changes
to labor quality (e.g., changes in Female LFPR decreases to labor quality (e.g., changes in Female LFPR decreases average labor force experience and perhaps average average labor force experience and perhaps average education)education)
Figure 4. Employment per Capita
90
95
100
105
110
115
120
125
1983 1988 1993 1998 2003
Tortoises
Middle Countries
EU
Hours per Employee
84
86
88
90
92
94
96
98
100
102
1983 1988 1993 1998 2003
Tortoises
Middle Countries
EU
Interpreting the Graphs ofInterpreting the Graphs ofE/N and H/EE/N and H/E
(H/N) = (E/N) * (H/E)(H/N) = (E/N) * (H/E) ’’79-’95 US minus EU H/N growth: 1.01%79-’95 US minus EU H/N growth: 1.01%
Half from employment per capita (E/N), half Half from employment per capita (E/N), half from hours per employee (H/E) from hours per employee (H/E)
US had rising E/N, EU had falling H/EUS had rising E/N, EU had falling H/E ’’95-’04, gap was -.76% (EU had higher 95-’04, gap was -.76% (EU had higher
growth)growth) E/N gap was -.85%, H/E .09%E/N gap was -.85%, H/E .09% Almost entirely explained by a shift up in EU E/NAlmost entirely explained by a shift up in EU E/N H/E seems to have stabilizedH/E seems to have stabilized
So when comparing employment to ALP, So when comparing employment to ALP, E/N is the margin we are going to focus onE/N is the margin we are going to focus on
0
0.2
0.4
0.6
0.8
1
1.2
15 to 19 20 to 24 25 to 34 35 to 44 45 to 54 55 to 64 65+
EU-15Tortoises
Middle Countries
E/N Ratio to the US
-- A lot is explained around 45-54 and 15-19
-- All are very similar for 35-44
Figure 7. Difference in Growth Rates of Employment per Capita by Sex-Age Group, Tortoises minus Middle Countries, 1995-
2005 minus 1985-1995, Employment and Share Effects
Employment Share
-1 -0.5 0 0.5 1 1.5 2
Women 65+
Women 55-64
Women 45-54
Women 35-44
Women 25-34
Women 15-24
Men 65+
Men 55-64
Men 45-54
Men 35-44
Men 25-34
Men 15-24
Contributions to the difference in the turnaround in the Middle countries versus the Tortoises
This is the standard shift-share analysis This is the standard shift-share analysis from industry-level productivity studies from industry-level productivity studies (see Stiroh and van Ark and Inklaar)(see Stiroh and van Ark and Inklaar)
Note that the Tortoises have a big Note that the Tortoises have a big passive advantage – share effects for 25-passive advantage – share effects for 25-3434
Large employment effects for prime age Large employment effects for prime age womenwomen Slightly smaller for prime age menSlightly smaller for prime age men
Teens and retirement aged contribute Teens and retirement aged contribute littlelittle
Male and Female employment rates
Notice the enormous growth in female E/N It even manages to have the biggest
acceleration following 1995 Men in the Tortoises have caught up,
women still have a long way to go
Average Growth RatesMiddle 1985 1995 2005 85-95 95-05 turnaroundMale 65.85 62.30 60.79 -0.55 -0.25 0.31
Female 41.46 44.81 48.09 0.78 0.71 -0.07
Tortoises 1985 1995 2005 85-95 95-05 turnaroundMale 57.72 57.93 60.94 0.04 0.51 0.47Female 26.02 30.97 39.88 1.74 2.53 0.79
Variables to explain E/NVariables to explain E/N Tax wedgeTax wedge EPL – measures of bargaining EPL – measures of bargaining
coordination, firing restrictions, etc.coordination, firing restrictions, etc. Percentage of employees part timePercentage of employees part time
Actually see little evidence of the business cycleActually see little evidence of the business cycle We can see whether part time employees are We can see whether part time employees are
new entrants to the labor forcenew entrants to the labor force Union densityUnion density
Union density and union power aren’t the sameUnion density and union power aren’t the same France has always had lower union density France has always had lower union density
than the US than the US
Explanatory variables are the tax Explanatory variables are the tax wedge, EPL, union density and net wedge, EPL, union density and net reservation wagereservation wage Net reservation wage measures Net reservation wage measures
generosity of unemployment benefitsgenerosity of unemployment benefits
We don’t worry about factors We don’t worry about factors affecting teens or those near affecting teens or those near retirement because those age retirement because those age groups don’t drive much of the groups don’t drive much of the divergence within the EUdivergence within the EU
Average Tax wedge, Average Tax wedge, 1960-20041960-2004
0
5
10
15
20
25
30
35
40
45
1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002
USMiddle
Tigers
EU-15
Tortoises
Note that the Tortoises are always highest, followed by Middle countries,followed by the Tigers and then the US
All countries markedly reduce taxes around 1997
Recall Prescott’s claim that the entire Recall Prescott’s claim that the entire gap between EU and US employment gap between EU and US employment can be explained by tax wedgescan be explained by tax wedges
If tax wedges are the main drivers of If tax wedges are the main drivers of employment variation, the employment variation, the compression in EU taxes is interestingcompression in EU taxes is interesting
►►Policy and E/N are converging but Y/H Policy and E/N are converging but Y/H is divergingis diverging
Employment Protection Legislation (EPL)
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
EU
Middle Countries
Tortoises
Figure 6. Union Density
20
25
30
35
40
45
1960 1965 1970 1975 1980 1985 1990 1995 2000
Middle Countries
Tortoises
EU
Net Reservation Wage
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
1960 1965 1970 1975 1980 1985 1990 1995 2000
Middle Countries
Tortoises
EU
Interpreting the GraphsInterpreting the Graphsof the Explanatory of the Explanatory
VariablesVariables EPL shows the same convergenceEPL shows the same convergence Union density shows the familiar Union density shows the familiar
declinedecline This is a messy variable because union This is a messy variable because union
power is criticalpower is critical The US has more unions than FranceThe US has more unions than France
The net reservation wage has risen, The net reservation wage has risen, with the Tortoises converging up with the Tortoises converging up rather than downrather than down
Regressions of employment per capita Population weighted, US and Lux. excluded Notice the importance of fixed effects Net reservation wage and EPL have positive
coefficients
VariableTax Wedge -0.51 *** 0.01 -0.68 *** -0.30 ***EPL -0.01 0.10 ***Union Density -0.23 *** 0.15 ***Output Gap 1.12 * 1.88 ** 0.79 1.42 *Net Reservation Wage 0.10 *** 0.06 ***
R2 0.59 0.01 0.66 0.23RMSE 0.135 0.205 0.122 0.181Number of Observations 352 352 352 352Fixed Effects? yes no yes no
E/N regressions by age, FE included Note the effect of the output gap declines with age (see
Jaimovich) Tax wedge has smaller effect on men and prime age
workers Union density almost always has negative effects
Gender Age R2Men 15-24 -1.02 *** 0 -0.05 *** 2.95 *** 0.1 ** 0.81Women 15-24 -1.03 *** 0.02 -0.04 * 2.5 *** 0.14 *** 0.88Men 25-34 -0.23 *** 0.01 -0.02 *** 1.26 *** -0.02 * 0.66Women 25-34 -0.43 *** 0.13 *** 0.08 *** 1.14 ** -0.07 * 0.74Men 35-44 -0.26 *** 0 0.01 0.73 *** -0.04 *** 0.53Women 35-44 -0.8 *** 0.13 *** 0.19 *** 0.56 -0.28 *** 0.82Men 45-54 -0.5 *** -0.03 0.09 *** 0.25 -0.21 *** 0.49Women 45-54 -0.93 *** 0.08 0.23 *** 0.2 -0.54 *** 0.8Men 55-64 -0.43 *** -0.07 ** -0.11 *** 0.77 * 0.19 *** 0.82Women 55-64 -0.67 *** 0 0.01 0.81 * -0.15 *** 0.95Men 65+ -1.26 *** 0.08 -0.47 *** -2.1 0.15 0.78Women 65+ -1.34 *** 0.07 -0.42 *** -1.83 0.18 0.75
Gap DensityTax Wedge EPL WageNet. Res. Output Union
Next We Turn to the Next We Turn to the PossiblePossible
Tradeoff of Y/H vs. E/NTradeoff of Y/H vs. E/N We next run regressions of productivity We next run regressions of productivity
growth on employmentgrowth on employment See Gordon(1997), Beaudry and Collard See Gordon(1997), Beaudry and Collard
(2001), McGuckin and van Ark (2005), (2001), McGuckin and van Ark (2005), basically any 1-factor modelbasically any 1-factor model
Even with instruments, the relationship Even with instruments, the relationship is robust across countries and time is robust across countries and time periodsperiods Beaudry and Collard provide evidence that Beaudry and Collard provide evidence that
the coefficient has shifted over timethe coefficient has shifted over time
Regressions of Productivity on Employment
Instruments are explanatory variables from prior regressions
Variable LagsEmployment Rate 0 -0.59 *** -0.52 ***
1 -0.09 -0.1
5 -0.05 -0.02
10 -0.07 -0.05Sum of all Lags -0.81 *** -0.68 *** Standard Error [0.13] [0.13]Sum of Lags 1 and 2 -0.69 *** -0.62 *** Standard Error [0.1] [0.09]
Change in Output Gap 0.82 *** 0.78 ***Ratio to US LP -0.022 *** -0.041 ***
Fixed Effects? no yes
Comments on the Comments on the ProductivityProductivityRegressionsRegressions
Coefficient on employment is -.7 to -.8Coefficient on employment is -.7 to -.8 No bounce back with later lagsNo bounce back with later lags Significant catch-up effectSignificant catch-up effect
Being 10% behind the US adds .2-.4% to Being 10% behind the US adds .2-.4% to ALP growth each yearALP growth each year
Country fixed effects do not affect Country fixed effects do not affect results much, as opposed to results much, as opposed to employment regressionsemployment regressions
We can now ask how policy shifts We can now ask how policy shifts affected productivity growthaffected productivity growth This is very much back of the envelope This is very much back of the envelope
– we need to be more careful in the – we need to be more careful in the futurefuture
Two basic effectsTwo basic effects Policy effectPolicy effect Female cultural effectFemale cultural effect
We can’t identify the total cultural effect We can’t identify the total cultural effect on women; we just get the gap the on women; we just get the gap the middle countries and tortoises:middle countries and tortoises: Take residual male employment growthTake residual male employment growth
Call Middle-Tortoise gap the endogenous partCall Middle-Tortoise gap the endogenous part To get exogenous female growth, take the To get exogenous female growth, take the
Middle-Tortoise gap for female residuals, Middle-Tortoise gap for female residuals, and subtract the endogenous effectand subtract the endogenous effect
Basically, female residual growth minus Basically, female residual growth minus male residual growth equals cultural effectsmale residual growth equals cultural effects
We can consider alternative identifying We can consider alternative identifying assumptions: get the B functions from assumptions: get the B functions from regressionsregressions
EEs,gs,g = A = Ass(POLICY(POLICYgg)+B)+Bss(ALP(ALPgg)+C)+Cs,gs,g S indexes genders {M,F}, G indexes country groups S indexes genders {M,F}, G indexes country groups
{I,T}; C represents cultural forces{I,T}; C represents cultural forces POLICY is the vector of policy variablesPOLICY is the vector of policy variables ALP is labor productivity growthALP is labor productivity growth Lower case letters represent first differencesLower case letters represent first differences
The residuals from the earlier regressions include The residuals from the earlier regressions include the B termsthe B terms
ResidResids,g s,g = e= es,g s,g – A– Ass(policy(policygg)=B)=Bss(alp(alpgg)+c)+cs,gs,g ResidResidM,IM,I-Resid-ResidM,TM,T=B=BM M (ALP(ALPII)- B)- BM M (ALP(ALPMM)) ccF,IF,I-c-cF,TF,T=(Resid=(ResidF,IF,I-Resid-ResidF,TF,T))
-(B-(BFF(alp(alpII)-B)-BFF(alp(alpTT)))) Two identifying assumptions:Two identifying assumptions:
BBMM= B= BFF
ccM,IM,I= c= cM,TM,T=0=0 ccF,IF,I-c-cF,TF,T=(Resid=(ResidF,IF,I-Resid-ResidF,TF,T)-(Resid)-(ResidM,IM,I-Resid-ResidM,TM,T))
Excess employment growth in the Tortoises
Using the above methodology, we get excess female growth of .63% per year
Excess policy driven employment growth of .13% Note the massive overprediction for US
employment growth Short digression on US trends and forecasts
Actual Predicted Actual Predicted Actual Predicted ResidualUS 62.89 61.23 62.34 70.74 -0.10 1.61 -1.70Middle 53.22 53.37 53.96 55.16 0.15 0.37 -0.21Tortoises 44.02 43.33 49.58 45.31 1.32 0.50 0.82
1995 2004 Avg. Growth Rate
Breaking Down the Middle-Breaking Down the Middle-Tortoise GapTortoise Gap
►►.13% gap in predicted .13% gap in predicted ΔΔE/NE/N
→→.1% gap in Y/H.1% gap in Y/H
►►.63% excess female E/N growth.63% excess female E/N growth
→→.48% gap in Y/H.48% gap in Y/H Adding the two exogenous employment Adding the two exogenous employment
shocks and multiplying by .75 gives a shocks and multiplying by .75 gives a predicted shortfall of .58%predicted shortfall of .58%
Of the 1.47 percentage point gap, we Of the 1.47 percentage point gap, we can explain 38% with employment can explain 38% with employment effectseffects
Should we expect this to continue?Should we expect this to continue? Women in the Tortoises still need to Women in the Tortoises still need to
raise employment by 8% to catch up raise employment by 8% to catch up to the middle countriesto the middle countries Translates to a 7.7% total gapTranslates to a 7.7% total gap Implies a further 5.75% shortfallImplies a further 5.75% shortfall Over ten years would imply a shortfall Over ten years would imply a shortfall
of .58% per yearof .58% per year Increased investment would offset Increased investment would offset
some of thissome of this
ConclusionsConclusions Across Europe we find a negative correlation Across Europe we find a negative correlation
between employment and productivity growthbetween employment and productivity growth As labor markets have been liberalized, some As labor markets have been liberalized, some
countries have experienced huge rises in countries have experienced huge rises in employmentemployment
Exogenous shocks can explain about 40% of Exogenous shocks can explain about 40% of the shortfall in ALP in the tortoisesthe shortfall in ALP in the tortoises
Future research needs to identify the sources Future research needs to identify the sources of the other 60%, starting with of the other 60%, starting with a return to the industry-by-industry analysisa return to the industry-by-industry analysis A dynamic analysis of capital adjustmentA dynamic analysis of capital adjustment