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The Role of Labor-Market Changes in the Slowdown of European Productivity

Author

Listed:
  • Ian Dew-Becker
  • Robert J. Gordon

Abstract

This paper is about the role of policy, institutions, and culture in creating a strong negative tradeoff between productivity and employment growth across groups of countries within Europe. Throughout the postwar era until 1995 labor productivity grew faster in Europe than in the United States. In the decade after 1995, productivity growth in the EU-15 slowed while that in the US accelerated. Europe’s productivity growth slowdown was largely offset by faster growth than the US in employment per capita, leaving little difference in growth of output per capita between the EU and US going back to 1980. We document the productivity-employment 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. 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 Italy 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.

Suggested Citation

  • Ian Dew-Becker & Robert J. Gordon, 2012. "The Role of Labor-Market Changes in the Slowdown of European Productivity," Review of Economics and Institutions, Università di Perugia, vol. 3(2).
  • Handle: RePEc:pia:review:v:3:y:2012:i:2:n:1
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    References listed on IDEAS

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    1. Rajan, Raghuram G. & Subramanian, Arvind, 2011. "Aid, Dutch disease, and manufacturing growth," Journal of Development Economics, Elsevier, pages 106-118.
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    6. Raghuram G. Rajan & Arvind Subramanian, 2008. "Aid and Growth: What Does the Cross-Country Evidence Really Show?," The Review of Economics and Statistics, MIT Press, pages 643-665.
    7. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, pages 547-570.
    8. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2004. "On The Empirics of Foreign Aid and Growth," Economic Journal, Royal Economic Society, vol. 114(496), pages 191-216, June.
    9. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, pages 547-570.
    10. Rajan, Raghuram G. & Subramanian, Arvind, 2011. "Aid, Dutch disease, and manufacturing growth," Journal of Development Economics, Elsevier, pages 106-118.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Onaran, Özlem & Galanis, Giorgos, 2012. "Is aggregate demand wage-led or profit-led? National and global effects," Greenwich Papers in Political Economy 15289, University of Greenwich, Greenwich Political Economy Research Centre.
    2. Andrea De Michelis & Marcello Estevão & Beth Anne Wilson, 2013. "Productivity or Employment: Is It a Choice?," International Productivity Monitor, Centre for the Study of Living Standards, pages 41-60.
    3. Lorenzo Codogno & Francesco Felici, "undated". "Assessing Italy's Reform Challenges:What Do Growth Accounting and Structural Indicators Say?," Working Papers 8, Department of the Treasury, Ministry of the Economy and of Finance.
    4. Renzo Orsi & Francesco Turino, 2014. "The last fifteen years of stagnation in Italy: a business cycle accounting perspective," Empirical Economics, Springer, pages 469-494.
    5. Damiani, Mirella & Pompei, Fabrizio & Ricci, Andrea, 2012. "Labour share and employment protection in European economies," MPRA Paper 43058, University Library of Munich, Germany.
    6. Renzo Orsi & Francesco Turino, 2014. "The last fifteen years of stagnation in Italy: a business cycle accounting perspective," Empirical Economics, Springer, pages 469-494.
    7. Michel Dumont & Chantal Kegels, 2016. "Working Paper 06-16 - Young Firms and Industry Dynamics in Belgium," Working Papers 1606, Federal Planning Bureau, Belgium.
    8. Raquel Ortega-Argilés, 2012. "The Transatlantic Productivity Gap: A Survey Of The Main Causes," Journal of Economic Surveys, Wiley Blackwell, vol. 26(3), pages 395-419, July.
    9. repec:pra:mprapa:43050 is not listed on IDEAS
    10. Nicholas Crafts, 2013. "Long-Term Growth in Europe: What Difference does the Crisis Make?," National Institute Economic Review, National Institute of Economic and Social Research, vol. 224(1), pages 14-28, May.
    11. Palazuelos, Enrique & Fernández, Rafael, 2009. "Demand, employment, and labour productivity in the European economies," Structural Change and Economic Dynamics, Elsevier, vol. 20(1), pages 1-15, March.
    12. Germana Giombini & Francesco Perugini & Giuseppe Travaglini, 2016. "The productivity slowdown puzzle of European countries: a focus on Italy," Working Papers 1606, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2016.
    13. Buiatti, C. & Duarte, J. B. & Saenz, L. F., 2017. "Why is Europe Falling Behind? Structural Transformation and Services' Productivity Differences between Europe and the U.S," Cambridge Working Papers in Economics 1708, Faculty of Economics, University of Cambridge.
    14. Junankar, Pramod N. (Raja), 2013. "Is there a Trade-off between Employment and Productivity?," IZA Discussion Papers 7717, Institute for the Study of Labor (IZA).
    15. Fabian Bornhorst & Ashoka Mody, 2012. "Tests of German Resilience," IMF Working Papers 12/239, International Monetary Fund.
    16. Bornhorst, Fabian & Mody, Ashoka, 2012. "Test of the German resilience," CFS Working Paper Series 2012/14, Center for Financial Studies (CFS).

    More about this item

    Keywords

    productivity; employment; productivity-employment tradeoff; european stagnation; mediterranean economies; labor market flexibility; european policy reforms; participation of women;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • 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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