EU-US convergence ? — Crooked Timber
The NYT ran yet another round in the long-running EU vs US series a week or so ago. Although it’s not covered explicitly in the NYT, there is actually some news to report here, in addition to rehearsal of the same old themes.
For quite some time, the US and the leading EU countries have been fairly comparable in terms of output per hour worked. The US has had higher output per person for two reasons: a relatively high employment/population ratio and very high average hours worked per person. The first of these is important because it raises the possibility that EU countries performing well on productivity measures are benefiting from the “Thatcher effect” . If low-skilled workers are excluded from employment, for example by restrictive macro policy, as in Thatcher’s case, or by labor market sclerosis, as claimed by critics of European institutions, then productivity measures are artificially boosted.
This issue is now moot. As a result of the crisis, the US employment/population ratio has dropped sharply, to the point where the US is now little different from the EU. The difference in GDP per person between the US and leading European countries is driven primarily by differences in average hours worked by employed people.
To get the data on this, I’ve had to combine Eurostat and OECD info (always a little problematic, but neither had all the info I wanted).
From Eurostat, the E/P ratio (total employment/pop 15-64) for the euro area was 58.5 in 1997 and rose to 64.8 by 2009 (France 64.2 , Germany 70.0). Over the same period, the US ratio has fallen from 73.5 to 67.6, with the bulk of the decline in the last couple of years. The remaining difference is entirely due to the higher US employment-population ratio for women – the ratios for men are virtually identical.
Turning to the OECD for information on productivity and GDP per capita, these tables shows that relative to the euro area as a whole, the US still has a substantial lead in productivity (about 15 per cent). But for the leading European economies, like France, Germany and the Netherlands, the productivity gap is below 10 per cent, which is well within the margin of error associated with PPP conversions. Particularly for the latter two, the big difference is in annual average hours worked (1681 for the US, 1390 for Germany, 1378 for the Netherlands). The difference in average hours almost entirely explains the gap in GDP per person between Germany and the US, and more than explains the gap for the Netherlands.
As is well known, Europeans tend to offset their lower hours of paid work by doing more household labor. Taking this into account properly would diminish the gap in both directions – relative to the US, European hours of work would rise, and so would output per person.
I was hoping for a good exposition of this from Peter Baldwin whose book The Narcissism of Minor Differences: How America and Europe are Alike has a promising title (I haven’t read it yet). Unfortunately, he only gets half of the story, saying
Americans work 23 percent more than Germans in the marketplace. However, once we factor in household labor, the drudgery that allows us to function in the world, the difference in total work drops to 12 percent. And interestingly, the figures for time actually spent at leisure are almost precisely the same for the two nations.
That Americans work 12 percent more than Germans seems to be the hard kernel that emerges from the statistics. Considering that for that 12 percent investment the American G.N.P. per capita is 32 percent higher than the German, this seems a defensible trade-off. Perhaps Americans have collectively decided to work somewhat harder to be substantially better off.
The problem here is that Baldwin has missed the point that household labor is productive.
Coming to my own take on all this, it seems that the European and US systems yield roughly equal productivity, and roughly equal labor market performance (as measured by E/P ratios). Higher European taxes mean more and better public services (at the cost of reduced private consumption) and they are also (along with social preferences) reflected in lower hours of work and more household labor. I know which looks more appealing to me, but there’s no obvious way of saying which is best.
Rather more clear-cut is the price paid by the US in terms of greater inequality. Compared to the European case, and to the US in the past, the top percentiles of US households collect a much larger share of total income, and there doesn’t seem to be any net economic payoff for this.
fn1. (Very wonkish note) Although PPP numbers are often treated as if they are are raw facts, they are index numbers which are fundamentally imprecise (even if the underlying data is perfectly accurate, which it isn’t). From work I did with Steve Dowrick in the 1990s, I estimate the difference between upper and lower bounds at around 10 per cent. It’s likely that any bias in PPP numbers favors the US. That’s because they are a generalized kind of Laspeyres index, and (as I understand it) the base data is derived largely from Europe.