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The Role of Labour Market Changes in the Slowdown of European Productivity Growth

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Author Info
Dew-Becker, Ian
Gordon, Robert J

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Abstract

Throughout the post-war era until 1995 labour productivity grew faster in Europe than in the United States. Since 1995, productivity growth in the EU-15 has slowed while that in the United States has accelerated. But Europe’s productivity growth slowdown was largely offset by faster growth in employment per capita, leaving little difference in growth of output per capita between the EU and US going back to 1980. This paper is about the strong negative trade-off between productivity and employment growth within Europe. We document this trade-off in the raw data, in regressions that control for the two-way causation between productivity and employment growth, and we show that there is a robust negative correlation between productivity and employment growth across countries and time. Our primary explanatory variables to explain both the revival of EU employment growth and the slowdown in productivity growth include six policy and institutional variables. We find that several of these variables have significant negative effects on employment per capita, with policy changes that raised labour costs reducing employment both before and after 1995. These variables, together with employment per capita, are then used to explain productivity growth, using several alternative treatments with instrumental variables. We also find a significant time effect, and we link this to an increase in labour force participation by women, particularly in southern European countries. We find that the negative effect of changes in employment per capita on changes in productivity is robust to alternative instruments and to the inclusion or exclusion of particular countries like the US or Spain. We conclude by suggesting that evaluations of alternative policy reforms in Europe should take into account any offsetting effects on employment and productivity by examining the ultimate impact on changes in income per capita.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6722.

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Date of creation: Feb 2008
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Handle: RePEc:cpr:ceprdp:6722

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Related research
Keywords: Effects of tax wedge on employment; Employment protection legislation; European employment growth; European productivity growth; labour force participation of women; Product market regulation;

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Find related papers by JEL classification:
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity
E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
E23 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Production
J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
N34 - Economic History - - Labor and Consumers, Demography, Education, Income, and Wealth - - - Europe: 1913-
O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Albert van der Horst & Hugo Rojas-Romagosa & Leon Bettendorf, 2009. "Does employment affect productivity?," CPB Discussion Papers 119, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  2. Claudia M. Buch, 2008. "The Great Risk Shift? Income Volatility in an International Perspective," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. Jacques Le Cacheux & Eloi Laurent, 2008. "Présidence française de l’union européenne : priorité à la lutte contre le changement climatique," Documents de Travail de l'OFCE 2008-19, Observatoire Francais des Conjonctures Economiques (OFCE). [Downloadable!]
  4. Jose Emilio Boscá & Rafael Domenech & Javier Ferri, 2008. "Tax Reforms and Labour-market Performance: An Evaluation for Spain using REMS," Working Papers 0804, International Economics Institute, University of Valencia. [Downloadable!]
    Other versions:
  5. Crafts, Nicholas & Toniolo, Gianni, 2008. "European Economic Growth, 1950-2005: An Overview," CEPR Discussion Papers 6863, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. Claudia M. Buch & Christian Pierdzioch, 2009. "Low Skill but High Volatility?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  7. Damiani, Mirella & Pompei, Fabrizio, 2009. "Labour protection and productivity in the European economies: 1995-2005," MPRA Paper 12710, University Library of Munich, Germany. [Downloadable!]
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