Social Europe

politics, economy and employment & labour

  • Themes
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

European Productivity’s Time-Out Is Over

Dieter Wermuth 26th February 2018

Dieter Wermuth

Dieter Wermuth

Productivity is not everything, but many economic problems can be solved more easily when it grows at a healthy clip. It is the key determinant of a country’s present and future standard of living. But, as it happens, since the oil crisis of the early seventies its growth rates have declined decade after decade in almost all advanced countries, and have slowed to a crawl in the years after the recent Great Financial Crisis.

Just as after the depression of the 1930s, secular stagnation, i.e. zero real GDP growth, has therefore become an issue once again, in spite of the digital revolution, near-perfect global market transparency, the increasingly intensive international division of labour, dramatically lower transportation costs and generous spending on research and development. For optimists, all these positive developments take time to show up in accelerated productivity growth. For them, we are still in the transitional phase. In the beginning, structural changes from the old to the new production function come at the cost of slower overall growth – think replacement of fossil fuel-burning power plants by alternative energy producers, the phasing-out of internal combustion engines and the rapid growth of the market for electric vehicles, or the damage caused by online to traditional retailers.

In the past, growth scares in the aftermath of deep recessions have reliably vanished from the radar screens of economists and policy makers once the effects of easy monetary and fiscal policies, implemented during the crisis, attractively low equity and other asset prices and moderate wage inflation led to a rebound of output and employment, followed by a self-sustaining broad-based expansion. I am convinced that this will be the case again. Productivity is not dead, it just took a time-out.

As the table shows, the transition has not yet been accomplished in the U.S. It is understandable that the issue of secular stagnation remains an issue there.

Labour Productivity *)

Average annual growth rates in %

  USA Japan Germany**) France Italy
1971-80 1.5 4.3 3.8 3.9 4.1
1981-90 1.6 4.1 2.3 2.9 1.8
1991-04 2.1 2.1 2.0 1.7 1.1
2005-15 1.1 0.8 0.9 0.6 0.1
2016-17 0.1        0.4***) 1.2 0.8 -0.2
*) real GDP per hour worked – **) West Germany through 1990 – ***) growth rate in 2016
sources: OECD, AMECO; own calculations

In Germany, the story is different. In the two years to the fourth quarter 2017, the country’s labour productivity has accelerated to an average rate of 1.58%, from 1.0% in the 15 previous years since the turn of the millennium. Whether the trend has turned for good remains to be seen, but at least in the near term it is likely that growth rates will remain robust.


Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content. We will never send you spam and you can unsubscribe anytime.

Sign up here

Here is a back-of-the-envelope calculation: going by business and consumer surveys as well as incoming orders in the manufacturing and construction industries, real GDP is chugging along at rates of 2½ to 3%. Provided labour input continues to expand at the annual 1.2% rate of the past four years this yields productivity growth rates of about 1½%.

This is good news. If productivity rises at a rate of 1% a year, it takes 70 years to double real GDP per hour, at a rate of 1.5% it is only 46½ years. These are the wonders of compound interest. The message is that policy makers should give boosting productivity growth top priority. If they succeed, challenges caused by the ageing of society, the deterioration of the infrastructure, the slow expansion of the capital stock in general, or the unfair distribution of income and wealth can be addressed with more confidence than in a low-growth environment.

Economists have not yet agreed on a comprehensive model that incorporates the most important factors responsible for the productivity slow-down. Candidates for such a list are the following: 1. Because of the uneven income distribution, people save too much – rich people do not consume enough. 2. Technological progress and population growth stagnate which reduces the return on investments which in turn leads to sub-optimal capital expenditures. 3. Large institutional investors increasingly emphasize the safety of their assets – whose real yields are therefore trending down (the “saving glut”) – rather than risky, higher-yielding assets. 4. The financial sector is dysfunctional: it fails to stimulate the willingness of people to take risks – which has caused the huge yield gap between risky and safe assets. 5. Because actual and expected inflation is so low, even a policy rate of zero is too high for a full-employment balance between saving and investment plans. 6. The weak demand for capital goods, combined with their falling prices, has led to a deterioration of profit expectations in this sector. I have adopted this list from a paper by Berkeley’s Bradford DeLong.

Seeing clearly

But going forward, it is clear what needs to be done. On the supply side, it helps to promote education and life-long learning, to ensure competition, for instance by keeping open borders, to provide tax incentives for investment and R&D, to correct the distribution of income and wealth, to cushion the blows of job losses and bankruptcies caused by the necessary structural change, and so on. It is not rocket science.

On the demand side, expansionary policies should remain in place as long as the economy is operating well below capacity limits. Supply in the form of more capital spending and an increase in the labour market participation rate often reacts positively to a robust growth of demand. If there is a lot of slack, the risk that inflation gets out of control is limited. This is the situation today.

I do not buy the argument that the economy of the euro area is already at full employment and that monetary and fiscal policies should therefore be tightened. First of all, there are still 14 million unemployed workers and thus 2.7m more than at the previous low in 2008. The so-called underemployment rate which takes account of discouraged, in addition to officially registered unemployed workers, is still at 17 percent of the labour force. That euro area compensation per hour worked is only 1.5 percent higher than a year ago also suggests that there is no scarcity of labour.

Seen from a different angle, employment may not continue to rise at the recent rate of 1.5% year-on-year, but certainly at the four-year average of 1.2%. Further assuming that productivity can grow at a rate of 1¼% from here on, it is entirely feasible that underlying real GDP trend growth is in the vicinity of 2½%, and not, as the OECD, the EU Commission, the IMF and the various German research institutes would have us believe, just 1¼%. A rate of 2¼% had been the ECB’s potential GDP growth rate before the financial crisis. I do not understand why there should have been such a sharp break in the series.

In other words, actual GDP is well below the capacity ceiling – which explains why core inflation is still only 1%, just as in the previous five years. In such an environment, the greatest risk to the continuation of today’s high productivity and real GDP growth in the euro area is an early tightening of the reins by the ECB. It would be a folly.


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

Dieter Wermuth

Dieter Wermuth is an economist who writes for the Herdentrieb blog, associated with the ZEITonline magazine. He is also a partner in a private equity boutique.

You are here: Home / Politics / European Productivity’s Time-Out Is Over

Most Popular Posts

European civil war,iron curtain,NATO,Ukraine,Gorbachev The new European civil warGuido Montani
Visentini,ITUC,Qatar,Fight Impunity,50,000 Visentini, ‘Fight Impunity’, the ITUC and QatarFrank Hoffer
Russian soldiers' mothers,war,Ukraine The Ukraine war and Russian soldiers’ mothersJennifer Mathers and Natasha Danilova
IGU,documents,International Gas Union,lobby,lobbying,sustainable finance taxonomy,green gas,EU,COP ‘Gaslighting’ Europe on fossil fuelsFaye Holder
Schengen,Fortress Europe,Romania,Bulgaria Romania and Bulgaria stuck in EU’s second tierMagdalena Ulceluse

Most Recent Posts

EU social agenda,social investment,social protection EU social agenda beyond 2024—no time to wasteFrank Vandenbroucke
pension reform,Germany,Lindner Pension reform in Germany—a market solution?Fabian Mushövel and Nicholas Barr
European civil war,iron curtain,NATO,Ukraine,Gorbachev The new European civil warGuido Montani
artists,cultural workers Europe’s stars must shine for artists and creativesIsabelle Van de Gejuchte
transition,deindustrialisation,degradation,environment Europe’s industry and the ecological transitionCharlotte Bez and Lorenzo Feltrin

Other Social Europe Publications

front cover scaled Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship
Women Corona e1631700896969 500 Women and the coronavirus crisis
sere12 1 RE No. 12: Why No Economic Democracy in Sweden?

ILO advertisement

Global Wage Report 2022-23: The impact of inflation and COVID-19 on wages and purchasing power

The International Labour Organization's Global Wage Report is a key reference on wages and wage inequality for the academic community and policy-makers around the world.

This eighth edition of the report, The Impact of inflation and COVID-19 on wages and purchasing power, examines the evolution of real wages, giving a unique picture of wage trends globally and by region. The report includes evidence on how wages have evolved through the COVID-19 crisis as well as how the current inflationary context is biting into real wage growth in most regions of the world. The report shows that for the first time in the 21st century real wage growth has fallen to negative values while, at the same time, the gap between real productivity growth and real wage growth continues to widen.

The report analysis the evolution of the real total wage bill from 2019 to 2022 to show how its different components—employment, nominal wages and inflation—have changed during the COVID-19 crisis and, more recently, during the cost-of-living crisis. The decomposition of the total wage bill, and its evolution, is shown for all wage employees and distinguishes between women and men. The report also looks at changes in wage inequality and the gender pay gap to reveal how COVID-19 may have contributed to increasing income inequality in different regions of the world. Together, the empirical evidence in the report becomes the backbone of a policy discussion that could play a key role in a human-centred recovery from the different ongoing crises.


DOWNLOAD HERE

ETUI advertisement

Social policy in the European Union: state of play 2022

Since 2000, the annual Bilan social volume has been analysing the state of play of social policy in the European Union during the preceding year, the better to forecast developments in the new one. Co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), the new edition is no exception. In the context of multiple crises, the authors find that social policies gained in ambition in 2022. At the same time, the new EU economic framework, expected for 2023, should be made compatible with achieving the EU’s social and ‘green’ objectives. Finally, they raise the question whether the EU Social Imbalances Procedure and Open Strategic Autonomy paradigm could provide windows of opportunity to sustain the EU’s social ambition in the long run.


DOWNLOAD HERE

Eurofound advertisement

Eurofound webinar: Making telework work for everyone

Since 2020 more European workers and managers have enjoyed greater flexibility and autonomy in work and are reporting their preference for hybrid working. Also driven by technological developments and structural changes in employment, organisations are now integrating telework more permanently into their workplace.

To reflect on these shifts, on 6 December Eurofound researchers Oscar Vargas and John Hurley explored the challenges and opportunities of the surge in telework, as well as the overall growth of telework and teleworkable jobs in the EU and what this means for workers, managers, companies and policymakers.


WATCH THE WEBINAR HERE

Foundation for European Progressive Studies Advertisement

Discover the new FEPS Progressive Yearbook and what 2023 has in store for us!

The Progressive Yearbook focuses on transversal European issues that have left a mark on 2022, delivering insightful future-oriented analysis for the new year. It counts on renowned authors' contributions, including academics, politicians and analysts. This fourth edition is published in a time of war and, therefore, it mostly looks at the conflict itself, the actors involved and the implications for Europe.


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

The macroeconomic effects of re-applying the EU fiscal rules

Against the background of the European Commission's reform plans for the Stability and Growth Pact (SGP), this policy brief uses the macroeconometric multi-country model NiGEM to simulate the macroeconomic implications of the most relevant reform options from 2024 onwards. Next to a return to the existing and unreformed rules, the most prominent options include an expenditure rule linked to a debt anchor.

Our results for the euro area and its four biggest economies—France, Italy, Germany and Spain—indicate that returning to the rules of the SGP would lead to severe cuts in public spending, particularly if the SGP rules were interpreted as in the past. A more flexible interpretation would only somewhat ease the fiscal-adjustment burden. An expenditure rule along the lines of the European Fiscal Board would, however, not necessarily alleviate that burden in and of itself.

Our simulations show great care must be taken to specify the expenditure rule, such that fiscal consolidation is achieved in a growth-friendly way. Raising the debt ceiling to 90 per cent of gross domestic product and applying less demanding fiscal adjustments, as proposed by the IMK, would go a long way.


DOWNLOAD HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube