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Two Centuries of Economic Growth: Europe Chasing the American Frontier

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  • Gordon, Robert J

Abstract

Starting from the same level of productivity and per capita income as the United States in the mid-nineteenth century, Europe fell behind steadily to a level of barely half in 1950, and then began a rapid catch-up. While Europe’s level of productivity has almost converged, its income per person has leveled off at about three-quarters of America’s. How could Europe be so productive yet so poor? The simple answer is that hours per person in Europe have fallen drastically in the past 40 years, reflecting long vacations, high unemployment, and low labour force participation, and only about one-third of the Europe-America difference reflects voluntarily chosen leisure. The Paper contains a welfare analysis of the difference and argues that conventional national income data overstate the advantage of America over Europe, and that Europe's ‘welfare’ is about 8% below the American level rather than the 25% implied by a comparison of measured income per capita. A historical analysis traces Europe’s falling behind after 1870 to American political unity, fostering large-scale material-intensive manufacturing and a set of marketing innovations, and to a set of additional advantages that would not have been possessed even if Europe had hypothetically created a United States of Europe in 1870. After 1913 the US surged further ahead, due to its early exploitation of the great inventions of electricity and the internal combustion engine, while Europe was distracted by wars and interwar economic chaos. After 1950 Europe’s catch-up was achieved both by exploiting the great inventions 40 years late, and also by the gradual erosion of early American advantages. But after 1995 the gap began to widen again, a development that brings to the forefront fundamental American advantages in fostering and exploiting innovation.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4415.

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Date of creation: Jun 2004
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Handle: RePEc:cpr:ceprdp:4415

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  1. Gordon, Robert J, 1995. "Is There a Trade-off between Unemployment and Productivity Growth?," CEPR Discussion Papers 1159, C.E.P.R. Discussion Papers.
  2. Paul A. David & Gavin Wright, 1999. "Early Twentieth Century Productivity Growth Dynamics: An Inquiry into the Economic History of "Our Ignorance"," Oxford University Economic and Social History Series _033, Economics Group, Nuffield College, University of Oxford.
  3. Gordon, Robert J, 2000. "Does the 'New Economy' Measure up to the Great Inventions of the Past?," CEPR Discussion Papers 2607, C.E.P.R. Discussion Papers.
  4. Goldin, Claudia, 1998. "America's Graduation from High School: The Evolution and Spread of Secondary Schooling in the Twentieth Century," Scholarly Articles 2664307, Harvard University Department of Economics.
  5. Paul M. Romer, 1987. "Crazy Explanations for the Productivity Slowdown," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 163-210 National Bureau of Economic Research, Inc.
  6. Devine, Warren D., 1983. "From Shafts to Wires: Historical Perspective on Electrification," The Journal of Economic History, Cambridge University Press, vol. 43(02), pages 347-372, June.
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