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Welfare, Employment, Productivity, and Policy Issues in the Comparison of Europe and the United States

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Title: Welfare, Employment, Productivity, and Policy Issues in the Comparison of Europe and the United States


1
Welfare, Employment, Productivity, and Policy
Issues in the Comparison of Europe and the United
States
  • Robert J. Gordon
  • Northwestern University, NBER, CEPR
  • IMF Institute, Washington, D.C.
  • May 21, 2007

2
What is Europe?
  • Throughout Europe refers to the EU-15, not the
    EU-25
  • Most of the first session compares EU-15 as a
    whole to the U. S.
  • The second session divides up the EU-15 into
    country groups ordered by post-1995 productivity
    growth
  • Time periods Session 1 entire postwar Session
    2 compares 1980-95 vs. 1995-2005

3
Todays Two Sessions
  • Session 1 Compares Europe and the U. S.
  • Income per Capita vs. Productivity
  • Hours per Capita
  • Unemployment, LFPR, Hours per Employee
  • Controversy about Policy, especially Taxes
  • Comparisons of Welfare
  • Extra leisure means less when unemployed or out
    of labor force, it isnt all long vacations
  • Role of extra household production in Europe
  • Is all leisure more enjoyable than work?
  • Does GDP Overstate U. S. Welfare?

4
After Break, Session 2
  • Focus on post-1995 EU Turnaround
  • Productivity growth has slowed down
  • Employment per capita growth has speeded up
  • In which Industries has EU Productivity Faltered?
  • Is there a Tradeoff between Employment and
    Productivity?
  • Channels from policy and institutions to E/N
  • Cultural changes in female LFPR
  • Contribution of employment turnaround to
    productivity turnaround
  • Good news vs. bad news conclusion

5
The Initial Comparisons
  • Unemployment
  • Inflation
  • Comparative Levels of Output per Capita
  • Comparative Levels of Productivity
  • Comparative Levels of Hours per Capita
  • The contribution of Unemployment
  • The contribution of LFPR
  • The contribution of Hours per Employee

6
Relation of this Session to the Assigned Readings
  • Friday noon deadline for the Powerpoint you have
    in front of you
  • I did the readings over the weekend and have
    added a few extra slides with comments on the
    readings
  • What Eichengreen, Alesina-Giavazzi, and Blanchard
    cover that I omit
  • And vice-versa
  • Red slides are not in your package

7
Unemployment Rates, 1996 and 2006
8
Inflation Rates (PCE Deflator), 1996 and 2006
9
What are the Substantive Issues?
  • Why is Europe so Productive yet so Poor?
  • If Y/H caught up but Y/N languished, then the
    superficial Answer is H/N has been falling
  • Why?
  • Blanchard (JEP, p. 4) The main difference is
    that Europe has used some of the increase in
    productivity to increase leisure rather than
    income, while the United States has done the
    opposite.
  • Blanchard will be the straw man in this
    discussion of more subtle interpretations

10
An Opposing View to Blanchards Taste for
Leisure
  • The notation Y/N Y/H H/N
  • And H/N H/E E/L L/N
  • By definition the decline in Europes Y/N related
    to Y/H can be divided into
  • Decline in relative H/E (35 1960-95)
  • Decline in relative E/N (65 1960-95)
  • Voluntary Leisure?
  • Some of decline in H/E is not voluntary
  • Most of decline in E/N is not voluntary

11
A Preview of the Charts
  • Comparison of Y/N and Y/H, how could Europe be so
    productive yet so poor?
  • Breakdown of H/N into E/N vs. H/E
  • Raw Numbers on E/N and H/E
  • E/L and L/N by Age

12
Y/N since 1960 Europe Fails to Converge and
then Falls Behind
13
Productivity (Y/H) Post-1960 The Ratio Reaches
96.9 in 1995
14
The EU/US Ratios Y/N compared to Y/H
15
The Distinction between H/N, E/N vs. H/E
16
What the Recent Debate has Missed
  • The EU/US Ratio for Employment-Population turned
    around in 1995
  • Why?
  • A reversal of labor market regulations?
  • A reversal of product market regulations?
  • A reversal of labor taxes?
  • But the decline in hours/employee did not turn
    around

17
Raw Numbers on Hours per Employee
18
Employment per Capita U.S. Women Marched Off to
Work 1965-1990
19
Summary of Turnaround in E/N vs. H/E
Table 1 Table 1 Table 1 Table 1
Levels and Growth Rates of Three Ratios of Europe to the United States, 1960-2004, percent Levels and Growth Rates of Three Ratios of Europe to the United States, 1960-2004, percent Levels and Growth Rates of Three Ratios of Europe to the United States, 1960-2004, percent Levels and Growth Rates of Three Ratios of Europe to the United States, 1960-2004, percent
       
  Hours Hours Employees
  per Capita per Employee per Capita
       
1960 119.8 102.4 115.9
1970 102.4 97.4 105.6
1995 73.6 87.1 85.7
2004 77.2 85.4 91.7
       
Annual      
Growth Rates Growth Rates    
       
1960-70 -1.6 -0.5 -0.9
1970-95 -1.3 -0.4 -0.8
1995-2004 0.5 -0.2 0.8
20
An Outline of Issues for Discussion
  • Europes failure to converge is not just a matter
    of voluntary vacations
  • Much more of the change 1960-95 was the decline
    in employment per capita
  • Even lower hours are not entirely voluntary
  • If the French really wanted to work only 35
    hours, why do they need the hours police?

21
What Matters for Welfare is Y/N Differential
Leisure, not Y/H
  • Europeans have bought their high productivity
    ratio with every conceivable way of making labor
    expensive
  • High marginal tax rates (payroll and income
    taxes)
  • Unions
  • Firing restrictions
  • Early retirement (55! 58!) with pensions paid
    for by working people
  • Lack of encouragement of market involvement by
    teens and youth

22
The Decline in Europes E/N Matters more than H/E
  • First, which age groups are suffering from higher
    unemployment in Europe?
  • Second, which age groups experience lower labor
    force participation in Europe?
  • Third, how does it come together in the
    distribution of low E/N by age group?
  • Note These graphs are for total population by
    age and blur male/female differences.

23
Unemployment by Age EU vs. US in 2002
24
Labor-force Participation by Age
25
Putting it Together Europe vs. US E/N by Age
Group
26
Decomposing the EU/US Difference in the E/N Ratio

age distribution unemployment LFPR E/N ratio E/N ratio
EU EU EU 87.14
US EU EU 86.19
EU US EU 91.23
EU EU US 97.11
US US EU 90.77
EU US US 102.1

27
Brief Summary of the Recent Prescott Debate
  • Prescott says its all higher taxes in Europe
  • This is consistent with
  • Firms cutting jobs
  • Employees choosing untaxed leisure
  • So decline in both H/E and E/N are involved
  • Problems
  • Alesina, labor supply elasticities dont match
  • The labor-supply elasticity for adult men is zero
  • The elasticity for females and teenagers is high,
    but they are only half of the story
  • Thus Prescott can explain only half of labor
    withdrawal
  • Me, not consistent with age distribution story

28
Ljungqvist-Sargents skepticism on the national
family
  • Prescott assumes national family, voluntary
    redistribution to those who withdraw labor
    because of high taxes
  • In reality most of those who withdraw labor
    supply because of high taxes are not supported by
    voluntary family transfers
  • Government expenditures are poor substitutes for
    private consumption
  • Yet by comparing EU vs US income pre-tax were
    equating one dollar of welfare transfer to one
    dollar of market consumption

29
Alesina on Unions and Regulation
  • Contrast between U. S. and EU
  • U. S. union penetration peaked in late 30s,
    1940s, declined after 1950s
  • Europe peaked in late 1970s, early 1980s
  • No disagreement about what unions do to the labor
    supply and demand diagrams
  • Unions push the economy northwest

30
Channels of European Union Influence (Alesina)
  • Unions keep wages artificially high
  • Unions may pursue a political agenda to reduce
    work hours
  • Unions have pushed for early retirement financed
    by state pensions
  • Unions impede the reallocation of labor in
    response to sectoral shocks
  • Neither Alesina nor critics notice turnaround in
    Europes E/N after 1995

31
Critique of Modern Macro Interpretations
  • About Alesina, timing is wrong. Union density
    increased 1960-80, but then fell to 1995 to about
    the same level as 1960
  • This argument from Rogerson (2006) ignores
    inertia in political process
  • Decline in unions and decline in taxes consistent
    with post-1995 turnaround in H/N

32
Reactions of Hours to Taxes
  • Regressions of H/N on tax wedge
  • Using H/N is a first approximation, need to study
    separate effects on E/N and H/E
  • Double-log specification, estimated elasticity of
    H/N to tax wedge is -0.4
  • Changes after 1995 dont match the tax changes
    very well, but they go in the right direction
  • Middle countries are the exception
  • While everybody else was increasing H/N, middle
    countries were working less counter to tax
    story

33
Is the Glass Half-Full or Half-Empty?
  • Recent Reports by the OECD and others join
    together high unemployment and slow productivity
    growth as part of a general malaise.
  • Our focus is different
  • Labor market and tax reforms have raised hours
    per capita after three decades of decline.
  • Rising hours per capita and declining growth of
    output per hour are signs of victory for European
    labor market reforms, not signs of defeat.

34
A Broader View The Welfare Cost of
Higher Unemployment
  • The distinction between marginal hours of leisure
    (40 work, 80 leisure) vs. inframarginal hours (20
    work, 100 leisure)
  • Leisure hours on vacations and weekends are more
    valuable than mid-week leisure hours
  • Apply analysis to unemployment
  • Apply analysis to early retirement

35
The Welfare Effect of Early Retirement
Back-of-Envelope
  • Baseline work age 20-65, retire 65-84
  • No saving, investment
  • 30 tax finances pay-as-you-go pensions with
    balanced govt budget
  • Tax finances equality of consumption in
    retirement to consumption during work years
  • Alternative retirement age at 55 requires tax
    increase to 45.6, 25.1 decline in consumption
    during work years and retirement

36
Welfare calculation
  • With 55 retirement age, after-tax wage is 25
    less
  • Extra hours switched from work to retirement
    leisure are low-valued (2/3)
  • Total welfare market consumption plus total
    value of leisure
  • Market consumption declines 25.1 percent, welfare
    declines 22.6 percent, ratio 90 (i.e., leisure
    offsets 10)

37
Some Time of Unemployed is Spent In Home
Production not Leisure
  • Freeman-Schettkat
  • Mmarket, Hhome production, Lleisure,
    Ppersonal time (sleep)
  • I set Pgt9.0 as Leisure
  • M H L P
  • Employed 8.0 2.5 4.5 9
  • Unemployed 1.0 4.5 9.5 9

38
Some Time of Unemployed is Spent In Home
Production not Leisure
  • Freeman-Schettkat, Economic Policy, January 2005
  • Mmarket, Hhome production, Lleisure,
    Ppersonal time (sleep)
  • I set Pgt9.0 as Leisure
  • Men Women
  • M H L P M H L
    P
  • US 1992 6.3 2.3 6.3 9 4.1 4.3 6.2
    9
  • EU early 90s 6.2 1.9 6.8 9 3.0 5.8 6.3
    9

39
Turn the Tables on the U. S. The Disconnect
between Welfare and PPP-Adjusted GDP
  • GDP Exaggerates U. S. GDP per Capita
  • Extreme climate, lots of air conditioning, low
    petrol prices, huge excess energy use
  • U. S. urban sprawl energy use, congestion
  • Crime, 2 million in prison
  • Insecurity, lack of employment protection, lack
    of citizens right to medical care
  • How much is this worth?

40
BTUs per GDP The EU-US Difference is only 2 of
GDP
41
Other Additions or Subtractions from Europes
Welfare
  • Urban Congestion?
  • London vs. NY? Paris vs. Chicago?
  • Time spent in London underground vs. in a Chicago
    automobile?
  • Prisons, perhaps 1 of GDP
  • Inefficiency of U.S. Medical Care
  • Undeniable U. S. superiority housing
  • People value interior square feet (2X in US)
  • People value exterior land (4X in US)

42
The Value of Extra Security in Europe
  • By Measuring Y/N Pre-tax instead of Post-Tax, we
    treat EU Welfare System as Valuable as Equivalent
    in Market Consumption
  • Prescott counts only the substitution effects of
    higher labor taxes
  • Europeans get full value back per tax dollar in
    valued government services
  • U comp, maternity leave, pensions, severance pay
  • To Make an extra allowance would be double
    counting

43
Additional Subtleties
  • Immigration?
  • U.S. Illegal but Voluntary
  • Illegal Immigrants have jobs
  • Alienated French banlieues
  • European immigrants more political than economic?
  • Inequality
  • U. S. median real income grows slower than mean
    real income, increasing skewness of income
    distribution

44
Table 3 Table 3 Table 3 Table 3
Summary of Adjustments to the Europe-to-U.S. Ratio of Per-capita Income, 2004 Summary of Adjustments to the Europe-to-U.S. Ratio of Per-capita Income, 2004 Summary of Adjustments to the Europe-to-U.S. Ratio of Per-capita Income, 2004 Summary of Adjustments to the Europe-to-U.S. Ratio of Per-capita Income, 2004
       
  Europe-to-U. S. Adjustment to Adjustment to
  Ratio of Real GDP per Capita Leisure Component of Hours GDP
       
Market PPP Ratio of Y per Capita 68.8

Add 2/3 of Difference
in Hours per Employee (11.8) 7.9
Add 1/10 of Difference      
in Employment per Capita (8.6)   0.9  
     
Add Half of Energy Use Difference     1.0
Add Prisons and Other 1.0
Add Medical Care Inefficiency     3.0

Sum of Market PPP Ratio and
above Additions 82.6    
       
Market PPP Ratio of Y per Hour 89.2
 
Percent Prody Gap Explained 67.6  
       
Percent Total Gap Explained 44.2    
45
To Conclude Session 1, Lets Look at Readings
  • Eichengreen, substantial overlap
  • His MIT School vs. Minnesota School
  • U. S. medical care, prisons, doesnt mention
    energy
  • His med care emphasis more on security, mine more
    on administrative inefficiency
  • He places more emphasis on inequality, and I
    should have also. Growth in US median wage much
    slower than average wage
  • He misses post-1995 turnaround in E/N and the
    distinction between leisure and home production

46
Eichengreen Chapter 13
  • Europes Institutions well-suited for 1945-73
    catching up, but not for innovation needed now
  • US higher education, synergy with research labs
  • US role in development of computer hardware,
    software, fueled by venture capital
  • Too much techno-pessimism, US productivity growth
    is slowing down
  • Will Europe catch up in retailing and services?

47
Alesina-Giavazzi
  • Excellent section on sociological history, why US
    never developed Marxian parties or attitudes
  • Self-selected immigrants believed they would get
    ahead
  • Lure of the frontier, free land
  • Winner-take-all Constitution prevents growth of
    small parties
  • Legal prevention of union organization until
    1930s
  • Fundamentally different attitudes toward
    taxation, welfare, and inequality
  • How much would this change in a Democratic
    Administration?

48
Blanchard on Unemployment
  • Emphasizes big increase in U duration in France
  • Unemployment has always been a very different
    experience in the US compared to Europe
  • Focuses on move to early retirement in France
    between 1968 and early 1980s
  • Agrees that change in H/N must be divided between
    H/E, E/L, and L/N
  • Partly misses post-1995 turnaround but does point
    to increased heterogeneity in Europe

49
More Blanchard
  • His vicious circle, high unemployment leads to
    destruction of human and physical capital
  • Emphasizes ambiguous effects of employment
    protection legislation. Reduces labor market
    flows but also employer incentives to hire.
  • His comparison of Spain vs. Portugal, a preview
    of the big role of Spain in Session 2 to come

50
Session 2 Is There an Employment- Productivity
Tradeoff?
  • Two marked events in Europe after 1995
  • Slowdown in productivity growth to well below the
    U. S. rate
  • Increase in growth of employment per capita at
    well above the U. S. rate
  • Are these connected causally or just a
    coincidence?
  • Which way does the causation go?
  • Co-authored with Ian Dew-Becker
  • Look him up on google

51
Ian in SF, you cant see MVPY
52
The US Accelerates, Europe Decelerates
  • From 1950 to 1995 EU productivity growth was
    faster than in the US
  • But in the past decade since 1995 we have
    witnessed
  • An explosion in US productivity growth
  • A slowdown in EU productivity growth roughly
    equal in size
  • An explosion in research on the US takeoff and
    but much less research on Europes slowdown
  • The magnitude of the shift (average EKSGK
    Groningen)
  • EU/US level of labor productivity (ALP)
  • 1979 1995 2004
  • 80 97 89

53
Point of Departure Post-95 Turnaround Plus New
Heterogeneity
  • This paper begins with two simple observations
  • 1. While European productivity (Y/H) has fallen
    back since 1995 relative to the US, output per
    capita (Y/N) has not fared nearly as badly
  • ?Y/H growth gap .9
  • ?Y/N growth gap .2
  • 2. After 1995, we see divergence across the
    EU-15 in Y/H growth
  • ? St. Dev. 1970-1995 0.62
  • ? St. Dev. 1995-2005 1.01

54
The Key Identity Suggests the Tradeoff
  • An identity links Y/N and Y/H to H/N
  • Y/N Y/H H/N
  • Thus the paradox of high European Y/H and low
    Y/N must be resolved by lower H/N
  • Also, Y/H and H/N are jointly determined
  • The task of this paper is going to be figure out
    which direction the causation runs
  • We will argue that a good deal of the decline in
    ALP growth is due to exogenous employment shocks
  • Also we will highlight the reversal of almost
    everything at 1995, comparing 1970-95 vs.
    1995-2005

55
Bringing Together the Disparate Literatures
  • Literature 1, why did Europes hours per capita
    (hereafter H/N) decline before 1995? Prescott,
    Rogerson, Sargent-Lundqvist, Alesina, Blanchard
  • High taxes, regulations, unions, high minimum
    wages
  • Europe made labor expensive
  • Movement up Labor Demand curve gt low employment
    high ALP
  • Literature 1 has missed the turnaround
  • Since 1995 there has been a decline in tax rates
    and employment protection measures unionization
    earlier
  • Big increase in hours per capita, turnaround in
    both absolute terms and relative to the US Move
    back down LD curve

56
Textbook Labor Economics
57
Pre-1995 Moving Northwest
  • 1970-95 EU climbs to the northwest
  • Hours per capita decline, average labor
    productivity increases
  • In this sense much of Europes 1970-95
    productivity catchup was artificial, propelled
    by policies making labor expensive
  • No busboys, grocery baggers, valet parkers
  • Product regulations kept stores shut tight many
    hours of the day/night
  • All this reduced Europes employment share in
    retail/services

58
Post-1995 Moving Southeast
  • 1995-2004 EU slides southeast
  • Hours per capita start increasing while they
    decline in the US
  • Effects are magnified by slow reaction of
    capital, eventually capital should grow faster
    offsetting much or all of productivity slowdown
  • Literature 1 misses the turnaround
  • Since 1995 decline in tax rates and employment
    protection measures
  • We are unaware of much macro-level research on
    the turnaround in hours
  • Allard and Lindert (2006) do not really mention
    it data only goes to 2001

59
Literature 2 The EU-US ALP gap
  • Central Focus of Lit 2 on post-1995 turnaround
    in US Productivity Growth
  • Jorgenson, Ho and Stiroh (2006) 95-00 due to
    ICT, 00-05 something else
  • Retail is often noted
  • Van Ark, Inklaar and McGuckin (2003)
  • Foster, Haltiwanger and Krizan (2002) on new
    establishments
  • Baily and Kirkegaard (2004) on regulations
  • Need to free land use restrictions

60
  • Fully 85 of EU productivity slowdown has its
    counterpart in a speed-up of EU H/N
  • Europe paid for lower ALP mainly with higher
    hours rather than less consumption
  • Saltari and Travaglini have made a similar point
    with respect to Italy
  • This runs counter to the Blanchard story about
    preferences for leisure
  • Now we hear that theyre not lazy, just
    unproductive
  • Huge literature on different structural reasons
    for EU sclerosis

61
Literature 3 relationship between Y/H and H/N
  • There is a long line of research examining the
    relationship between hours and productivity
  • Even using an IV approach, increases in H/N drive
    down Y/H
  • This makes sense in a single factor model or with
    any slow adjustment of capital
  • Measuring the speed of adjustment of investment
    is difficult future research for us
  • View todays talk as a report on research in
    progress, not the final polished word

62
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63
Interpreting the Post-1995 Turnaround
  • Simple HP trends
  • Europe is continuing its long slow decline
  • Turnaround is generally pegged at 1995
  • The EU-15 stops catching up, and the US takes off
  • We are mainly going to examine the determinants
    of the turnaround i.e. changes in Y/H growth
    post-1995
  • Qualification US trend peaks in 2002-03 and is
    now declining

64
New US Productivity Trends Based on March 2007
Quarterly Data
65
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66
We Need to Look at Everything Per Capita
  • Population growth in EU 0.7 percent per year
    slower than US over the past decade
  • Output per capita in the EU doesnt look bad at
    all
  • Post-1995 hours turnaround is a counterpart to
    the Y/H turnaround
  • We will see that there is a similar pattern
    within the EU strong negative correlation
    between the hours and ALP turnarounds

67
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68
  • The US has experienced an enormous decline in
    hours growth when capital growth fell
  • Thus capital-deepening numbers for US are
    misleading as they reflect as much movements in
    the denominator as in the numerator.
  • Cumulative hours growth zero 2000-06, growth in
    hours per capita negative
  • The EU had strong hours growth while the US went
    through its recession and recovery

69
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70
Defining Tigers and Tortoises, Pop Shares and
Private ALP Growth
  • Tigers Ireland, Finland, Greece
  • Pop Share 5 ALP 4.79
  • Middle Sweden, Austria, UK, Germany, Portugal,
    France
  • Pop Share 61 ALP 2.45
  • Tortoises Belgium, Netherlands, Denmark,
    Luxembourg, Spain, Italy
  • Pop Share 34 ALP 0.72

71
  • We break the EU-15 into three groups based on
    post-95 Y/H growth
  • Tigers Ireland, Finland and Greece
  • Middle Countries Sweden, Austria, UK, Germany,
    Portugal and France
  • Tortoises BeNeLux, Denmark, Spain and Italy

72
A closer look at the Tortoises
  • Mainly driven by Spain and Italy
  • Spain
  • ?-4.44 turnaround in Y/H
  • ?5.01 turnaround in H/N
  • Italy
  • ?-2.25 turnaround in Y/H
  • ?1.08 turnaround in H/N
  • Had we ranked the countries according to output
    per capita, Spain would be a Tiger

73
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74
Making Sense of Cross-EU Heterogeneity
  • Notice the homogeneity pre-1995 and heterogeneity
    post-95
  • The only two countries with a noticeable
    acceleration are Greece and Ireland
  • Sweden a bit up and UK a bit down
  • Sharp declines for France, Portugal, and all the
    Tortoises
  • For most of the remainder of the paper, we focus
    only on the middle countries and tortoises
  • The tigers are special cases they do not
    provide any policy lessons for the rest of the EU

75
The New Results in this Paper at the Industry
Level
  • We aggregate productivity growth by industry in a
    way that allows us to determine the relative role
    of productivity and shares
  • The productivity effect is just the difference
    in productivity growth in a given industry
  • The share effect is the addition or subtraction
    from growth as shares shift within industries.
  • Example Ireland shifts to high tech
    manufacturing, this comes out as a share effect
    within manufacturing

76
Contributions, Productivity vs. Share Effects, in
EU-US, 1995-2003
Manufacturing is nearly as important as retail
But ICT is tiny Only 2 hours share
77
ALP growth multiplied by nominal shares
US acceleration is widespread, not just in
retail and manufacturing. EU weakness is also
widespread
78
Tortoises vs. Middle
Failure is more widespread. Totally unrelated
industries account for the decline Note that this
is largely driven by productivity, not share
effects
79
Interpreting the Tortoise Problem after 1995
  • Failure is across the board
  • Consistent with basic theme of paper, that there
    is a macro cause
  • How much due to a reduction in taxes and in
    regulations?
  • How much remains for an exogenous decline in TFP
    growth?
  • Understanding Share Effects
  • ICT Share higher in US vs EU and also middle vs
    tortoises
  • Big EU share deficit in retail/wholesale and
    services, consistent with high tax story
  • Part of Tiger success is moving resources, out of
    agriculture for Greece and Ireland, into ICT mfg
    for Ireland and Finland

80
Research Strategy
  • Divergence across the EU has increased
  • The Y/H slowdown in the tortoises in most
    countries is balanced by healthy H/N growth
  • We are going to then try to break down the
    determinants of the middle-tortoise gap in Y/H
    growth and relate it to H/N growth

81
Qualification Were Not Dealing with Capital
Adjustment
  • ALP Growth
  • ?labor quality
  • ?capacity utilization
  • capital deepening
  • TFP
  • We focus for now on capital deepening
  • Simple one-factor framework based on the textbook
    labor demand curve with fixed capital
  • Making capital adjustment endogenous next on our
    agenda
  • Also next on agenda is tracing link from policy
    changes to labor quality (e.g., changes in Female
    LFPR decreases average labor force experience and
    perhaps average education)

82
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83
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84
Interpreting the Graphs of E/N and H/E
  • (H/N) (E/N) (H/E)
  • 79-95 US minus EU H/N growth 1.01
  • Half from employment per capita (E/N), half from
    hours per employee (H/E)
  • US had rising E/N, EU had falling H/E
  • 95-04, gap was -.76 (EU had higher growth)
  • E/N gap was -.85, H/E .09
  • Almost entirely explained by a shift up in EU E/N
  • H/E seems to have stabilized
  • So when comparing employment to ALP, E/N is the
    margin we are going to focus on

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E/N Ratio to the US
-- A lot is explained around 45-54 and 15-19
-- All are very similar for 35-44
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  • Contributions to the difference in the turnaround
    in the Middle countries versus the Tortoises

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  • This is the standard shift-share analysis from
    industry-level productivity studies (see Stiroh
    and van Ark and Inklaar)
  • Note that the Tortoises have a big passive
    advantage share effects for 25-34
  • Large employment effects for prime age women
  • Slightly smaller for prime age men
  • Teens and retirement aged contribute little

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  • Male and Female employment rates
  • Notice the enormous growth in female E/N
  • It even manages to have the biggest acceleration
    following 1995
  • Men in the Tortoises have caught up, women still
    have a long way to go

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Variables to explain E/N
  • Tax wedge
  • EPL measures of bargaining coordination, firing
    restrictions, etc.
  • Percentage of employees part time
  • Actually see little evidence of the business
    cycle
  • We can see whether part time employees are new
    entrants to the labor force
  • Union density
  • Union density and union power arent the same
  • France has always had lower union density than
    the US

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  • Explanatory variables are the tax wedge, EPL,
    union density and net reservation wage
  • Net reservation wage measures generosity of
    unemployment benefits
  • We dont worry about factors affecting teens or
    those near retirement because those age groups
    dont drive much of the divergence within the EU

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Average Tax wedge, 1960-2004
Note that the Tortoises are always highest,
followed by Middle countries, followed by the
Tigers and then the US All countries markedly
reduce taxes around 1997
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  • Recall Prescotts claim that the entire gap
    between EU and US employment can be explained by
    tax wedges
  • If tax wedges are the main drivers of employment
    variation, the compression in EU taxes is
    interesting
  • ?Policy and E/N are converging but Y/H is
    diverging

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Interpreting the Graphs of the Explanatory
Variables
  • EPL shows the same convergence
  • Union density shows the familiar decline
  • This is a messy variable because union power is
    critical
  • The US has more unions than France
  • The net reservation wage has risen, with the
    Tortoises converging up rather than down

97
  • Regressions of employment per capita
  • Population weighted, US and Lux. excluded
  • Notice the importance of fixed effects
  • Net reservation wage and EPL have positive
    coefficients

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  • E/N regressions by age, FE included
  • Note the effect of the output gap declines with
    age (see Jaimovich)
  • Tax wedge has smaller effect on men and prime age
    workers
  • Union density almost always has negative effects

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Next We Turn to the Possible Tradeoff of Y/H vs.
E/N
  • We next run regressions of productivity growth on
    employment
  • See Gordon(1997), Beaudry and Collard (2001),
    McGuckin and van Ark (2005), basically any
    1-factor model
  • Even with instruments, the relationship is robust
    across countries and time periods
  • Beaudry and Collard provide evidence that the
    coefficient has shifted over time

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Regressions of Productivity on Employment
  • Instruments are explanatory variables from prior
    regressions

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Comments on the Productivity Regressions
  • Coefficient on employment is -.7 to -.8
  • No bounce back with later lags
  • Significant catch-up effect
  • Being 10 behind the US adds .2-.4 to ALP growth
    each year
  • Country fixed effects do not affect results much,
    as opposed to employment regressions

102
  • We can now ask how policy shifts affected
    productivity growth
  • This is very much back of the envelope we need
    to be more careful in the future
  • Two basic effects
  • Policy effect
  • Female cultural effect

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  • We cant identify the total cultural effect on
    women we just get the gap the middle countries
    and tortoises
  • Take residual male employment growth
  • Call Middle-Tortoise gap the endogenous part
  • To get exogenous female growth, take the
    Middle-Tortoise gap for female residuals, and
    subtract the endogenous effect
  • Basically, female residual growth minus male
    residual growth equals cultural effects
  • We can consider alternative identifying
    assumptions get the B functions from regressions

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  • Es,g As(POLICYg)Bs(ALPg)Cs,g
  • S indexes genders M,F, G indexes country groups
    I,T C represents cultural forces
  • POLICY is the vector of policy variables
  • ALP is labor productivity growth
  • Lower case letters represent first differences
  • The residuals from the earlier regressions
    include the B terms
  • Resids,g es,g As(policyg)Bs(alpg)cs,g
  • ResidM,I-ResidM,TBM (ALPI)- BM (ALPM)
  • cF,I-cF,T(ResidF,I-ResidF,T)
  • -(BF(alpI)-BF(alpT))
  • Two identifying assumptions
  • BM BF
  • cM,I cM,T0
  • cF,I-cF,T(ResidF,I-ResidF,T)-(ResidM,I-ResidM,T)

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Excess employment growth in the Tortoises
  • Using the above methodology, we get excess female
    growth of .63 per year
  • Excess policy driven employment growth of .13
  • Note the massive overprediction for US employment
    growth
  • Short digression on US trends and forecasts

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Breaking Down the Middle-Tortoise Gap
  • ?.13 gap in predicted ?E/N
  • ?.1 gap in Y/H
  • ?.63 excess female E/N growth
  • ?.48 gap in Y/H
  • Adding the two exogenous employment shocks and
    multiplying by .75 gives a predicted shortfall of
    .58
  • Of the 1.47 percentage point gap, we can explain
    38 with employment effects

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  • Should we expect this to continue?
  • Women in the Tortoises still need to raise
    employment by 8 to catch up to the middle
    countries
  • Translates to a 7.7 total gap
  • Implies a further 5.75 shortfall
  • Over ten years would imply a shortfall of .58
    per year
  • Increased investment would offset some of this

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Conclusions
  • Across Europe we find a negative correlation
    between employment and productivity growth
  • As labor markets have been liberalized, some
    countries have experienced huge rises in
    employment
  • Exogenous shocks can explain about 40 of the
    shortfall in ALP in the tortoises
  • Future research needs to identify the sources of
    the other 60, starting with
  • a return to the industry-by-industry analysis
  • A dynamic analysis of capital adjustment
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