Europe needs to close the gaping productivity gap with the U.S. if it is to compete in the modern economy.
That’s the warning that Sweden’s central bank boss Erik Thedéen has for both his country and the rest of the continent, only a day after the Riksbank governor took the initiative to raise interest rates before the Fed, signaling a possible divergence in monetary policy across the Atlantic.
“They are outperforming Europe, including Sweden—the productivity growth in the U.S. has been much stronger. That is very important for European policymakers to try to address,” Riksbank governor Thedéen told the Financial Times.
Productivity in an economy is typically measured as output, or GDP, per worker. It is seen as vital to improving quality of life by encouraging wage growth. Thedéen is correct that by this metric, Europe has a lot of catching up to do.
In the U.S., GDP per hour worked has risen by 56% since 1995, according to data compiled by the OECD. In the European Union, meanwhile, it has risen by 40%.
The U.K. is another country that has been plagued by slowing productivity growth since the 2007/08 financial crisis, leaving its economy substantially smaller than once expected.
Just work harder?
Because it is a per-worker measure, the conversation on improving productivity tends to land on what those workers in Europe could do differently to up their output.
It’s a line of debate that’s been stoked recently by some of the most influential business figures on the continent.
Speaking to the FT in April, Nicolai Tangen, the CEO of Norway’s $1.6 trillion sovereign wealth fund, said a “worrisome” divergence in U.S. innovation was down to a higher “general level of ambition”.
“We are not very ambitious. I should be careful about talking about work-life balance, but the Americans just work harder,” Tangen said.
He added that Americans had a bigger appetite for risk than their neighbors across the Atlantic, which helped them to succeed.
“There’s a mindset issue in terms of acceptance of mistakes and risks. You go bust in America, you get another chance. In Europe, you’re dead.”
Some European countries don’t do much to help themselves in denying those claims.
Data analyzed by King’s College London showed that people in the U.K. were among the least work-oriented in the world, saying work was much less important to them than to their counterparts in the U.S. and other parts of Europe. It might have come at a cost.
Indeed, research from the Resolution Foundation suggested economic stagnation since 2007 has left British workers £8,300 ($10,500) worse off compared to peers like Germany and France, owing to slower productivity growth.
The real reason
In reality, productivity is a complex issue that involves the size, efficiency and diversity of markets, capital investment and technology diffusion. It’s reductive to suggest it’s only about how hardworking individual workers are.
Indeed, if the main determinant of productivity was hours worked, then there wouldn’t be much of a difference. The EU calculated that the average European clocked 37.3 hours of work per week, only marginally below the 38 hours Americans typically work, according to the International Labor Organization.
U.S. productivity started to diverge from Western Europe in the 1990s. Academics at the American Economic Association say the main cause was the country’s early investment in the knowledge economy, with tech going on to dominate the business world after the dotcom bubble.
In order to close this gap, researchers at the European Union said the continent needed to address financial and administrative barriers to entry for businesses and entrepreneurs.
