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Wednesday, July 28, 2004

Europe Suffering From Productivity Paralysis? via Bweek

since 1995, Europe has trailed America in productivity.Boosting labor productivity is the key to creating higher profits, improving living standards, and keeping prices stable. For decades after World War II, Europe kept pace or even surpassed the U.S. in productivity growthThe gap is even widening. This year the U.S. should record productivity gains of 3.3%, according to Eurostat, the statistical agency of the European Union. That's almost twice the rate of France and Germany and well above the British rate (yes, even dynamic Britain is struggling in this area). Europe now has an hourly output per worker some 20% below American levels.The productivity numbers have become so alarming that European Central Bank boss Jean-Claude Trichet warned about the problem in a July 1 speech. The Dutch, who have seen their once-robust economy stumble, are getting worried. "Future economic growth will require a substantial increase in our productivity," says Economic Affairs Minister Laurens Jan Brinkhorst. Patricia Hewitt, the British Secretary of State for Trade & Industry, has made improving productivity a top priority: It's the only way Britain can close a still-considerable gap in living standards between British workers and their U.S. counterparts.Europe is not seeing the same productivity bang from information technology that the U.S. has enjoyed over the past decadeUniquely European factors -- from stiff job-protection codes to hidden barriers against competition -- amplify the problem.Europe also simply doesn't have as large a tech sector as the U.S. That matters because fast-growing technology companies are themselves major contributors to productivity growth. According to McKinsey & Co., the IT sector generates 2.3% of total GDP in the U.S., but only 1.3% and 1.5% in France and Germany, respectively. McKinsey says that the U.S. tech sector accounts for more than a quarter of the entire economy's productivity growth. (Some studies suggest it is much higher.) In contrast, a smaller IT sector generates less than 20% of productivity growth in Europe.Only a systematic surge in IT spending, increased focus on R&D,coupled with serious labor-market reforms,would change the dynamic in Europe.
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