Underutilisation of Labour in (Continental Western) Europe: A Detailed GDP Accounting Perspective

The paper decomposes GDP both in terms of level per capita and growth rate, so as to identify the extent of labour utilisation in Europe and its effect on income differences and economic growth in all EU27 countries. While some caveats are associated with this approach, GDP is broken down into 5 items (per capita GDP level) and 12 (GDP growth), decomposing labour inputs thoroughly and including a partial but comparable indicator of labour quality, based on the employment composition by educational attainment. The level of labour utilisation in the EU, defined as hours worked per capita, is clearly lower than that seen in the US and the 5 richest EU countries. The labour underutilisation accounts for two thirds of the per capita GDP gap in the EU15 vis-à-vis the US (17 p.p. out of 26%). The underutilisation of labour is much lower in the New Member States, being only 9% below the US level and is even above that in the five richest EU Member States. While the combination of lower labour utilisation and lower per-hour productivity is the cause of relatively low per capita GDP in euro area and EU15 countries, weak hourly productivity is the main concern in the New Member States. Over the last ten years (1995-2006), the growth in labour input (i.e. total hours worked) was the driving force behind one third of GDP growth in the EU15, while labour input growth only explained a very modest part of the buoyant GDP growth in the New Member States.