Home > Economy, financial crisis > Productivity in Europe: two graphs

Productivity in Europe: two graphs

from Merijn Knibbe

Introduction: instead of looking at an ill defined variable like Unit Labor Cost to investigate competitiveness, it’s better to look at a still quite vague (it excludes household production and social and environmental effects) but better defined variable like ‘productivity’. The transition economies are rapidly closing the EU productivity gap EU.  So do Italy, the UK and even Germany…. Since 2006, Spain increases its relative productivity – but this is to little avail as unemployment in Spain has reached 21%.

Leaders of the EU have negotiated a Greek debt deal. I’m not impressed, yet. Mark Rutte, prime minister of the Netherlands and Jan Kees de Jager, minister of finance of the Netherlands, told the press that the deal involved a total of 109 milliard Euro – while all other heads of state seem to have the idea that the amount involved is 159 milliard Euro…. somebody is fifty milliard wrong (yes, I write milliard). Update: guess who were wrong… all of them. According to a letter  of de Jager to the Dutch parliament (which asked for an explanation; de Jager will loose his job if such a letter contains an intentional lie or intentionally leaves out crucial information) the total value of the deal is 215 milliards. Oops. For Dutch readers: Wouter Bos, waar ben je…

Anyway, in a statement accompanying the deal the next sentence can be found:

All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances”

Sounds good. But how do these guys and gals define ‘competitiveness’? They probably mean the economic definition of this concept which, nowadays, seems to boil down to low and falling ‘Unit Labor Cost’ (ULC), Eurostat definition (see for instance a presentation of Lorenzo Smaghi, member of the board of the European Central Bank, here). But is this metric up to the task and do falling ULC in Germany indeed indicate that Germany is ‘competitive’ and are they the reason why Germany does relatively well?

The answer to the first question is an unequivocal NO. The Eurostat definition implies that when (as happened in the Netherlands) self-employed slash their rates and farming income declines while wages stay put ULC rise… while the opposite happens when (as happened in the Netherlands) wage laborers become ‘self employed’ with rates higher than their former wage:

This derived indicator compares remuneration (compensation per employee) and productivity (gross domestic product (GDP) per employment) to show how the remuneration of employees is related to the productivity of their labour. It is the relationship between how much each “worker” is paid and the value he/she produces by their work….Please note that the variables used in the numerator (compensation, employees) refer to employed labour only, while those in the denominator (GDP, employment) refer to all labour, including self-employed.” (source: Eurostat)

And the concept knows quite some other conceptual as well as empirical problems (see here for a brilliant Levy institute paper, hat tip to Jesse Frederik)

But is there an alternative. Fortunately, Eurostat does provide data which enable an analysis of at least one aspect of competitiveness: productivity or GDP per hour. This variable still is quite vague: competitiveness is basically a sectoral thing. The Greek tourism sector is quite competitive – as long as high VAT rates get ‘out of its sun’, to paraphrase Diogenes. And Mercedes is quite competitive, which is not due to low prices or low wages. This competitiveness is not directly related to productivity. Productivity in tourism is notoriously low while car factories know very high productivity. It’s all somewhat complicated. But the ‘GDP per hour’ metric at least enables in-depth investigations even within the main stream framework,  is, contrary to the Eurostat ULC metric, based upon all hours and can be broken down into sectoral data (see a mainstream article here).

What do such data tell us, when we look at post 1995 productivity of EU nations? It’s not the same story as the ULC tells us (graph 1 and 2). Germany does not do that well. And a country like Italy, with a very dismal record of productivity increase, is in a better (though not good) economic shape than a country like Spain, where productivity is on the rise (which, however, is probably caused by the decline of construction which its low productivity). The same holds a fortiori for Ireland (not shown in the graph). The transition economies are rapidly closing the productivity gap – and so does the UK. But neither the level nor the growth or decline of productivity seem to be of much help to explain why some countries are doing relatively well, at the moment, while others don’t. Greek and Irish and Spanish productivity increased, in fact, quite a bit faster than German productivity and much, much faster than Italian productivity… An increase of productivity can be a good thing – we don’t have to spend whole winters threshing grain anymore, or to eek out a living by selling 50 litres of milk a day. But differences in the level and the rate of change of productivity do not seem to explain why some countries are in debt trouble and others aren’t.

P.S. – one quote from the Levy institute paper, about one of the real reasons behind the differences in ‘competitiveness’ (p. 11): “If we increase the number of products exported with revealed comparative advantage to the top 100 most complex, Germany’s exports of these products represent 18% of world exports, against Ireland’s 0.81%, Spain’s 0.89%, Greece’s 0.02%, and Portugal’s 0.04%”.

  1. Bruce
    July 28, 2011 at 7:09 pm

    Who Is In Worse Shape – the United States or Europe?
    with 8 comments
    By Simon Johnson Baseline open article:

    (2) In the article this sentence is a portal link: “…In a {policy paper released by the Peterson Institute for International Economics last Thursday}, Peter Boone and I went through the details on the eurozone crisis, including how this common currency area got itself into such deep trouble – and what exactly are the likely scenarios now (you can also see the discussion and contrasting views at the launch here).

    (3) Discussion: Europe on the Brink

    Europe on the Brink

    Peter Boone, Peterson Institute for International Economics
    Simon Johnson, Peterson Institute for International Economics
    Jacob Funk Kirkegaard, Peterson Institute for International Economics

    Peterson Institute for International Economics, Washington, DC

    July 21, 2011

  2. Ignacio
    March 6, 2012 at 2:26 pm

    You wrote:

    ” Spain, where productivity is on the rise (which, however, is probably caused by the decline of construction which its low productivity).”

    According to your graph, productivity in Spain started raising in 2005. 2005, 2006 and 2007 were precisely the years when residential construction peaked and yet a noticeable increase in productivity is observed.

  3. Daniel Linotte
    October 31, 2012 at 8:37 am

    What is the link between productivity and competitiveness?
    The US is above the EU and has a huge trade deficit?
    Greece also stagnates – this could also explain de debt crisis?

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