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