Throughout the postwar era until 1995 labor 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 tradeoff between productivity and employment growth within Europe. We document this tradeoff 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, both before and after 1995. We also find a significant time effect, that the increase in European employment per capita increased after 1995 for reasons that go beyond our six explanatory variables, and we link this time effect to a secular increase in the labor-force participation of women, particularly in southern European countries. 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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13840.
Length: Date of creation: Mar 2008 Date of revision: Handle: RePEc:nbr:nberwo:13840
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Find related papers by JEL classification: E0 - Macroeconomics and Monetary Economics - - General E23 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Production E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
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Ricardo Lagos, 2006.
"A Model of TFP,"
Review of Economic Studies,
Blackwell Publishing, vol. 73(4), pages 983-1007, October.
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Lagos, R., 2001.
"A Model of TFP,"
Working Papers
01-08, C.V. Starr Center for Applied Economics, New York University.
[Downloadable!]
Ricardo Lagos, 2006.
"A model of TFP,"
Staff Report
345, Federal Reserve Bank of Minneapolis.
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