Question

Discuss the constraints of growth in Europe vs. the United States.

(Explain in terms of productivity/technology/labor)

(Baumol/Blinder textbook has lots of information on this topic)

Answer 1

Average annual labor productivity growth measured as GDP per hour work in the US accelerated from 1.2% in 1973-1995 period to 2.3% during 1995-2006 period in comparison to 15 European countries till 2004 which were part of EU, their average annual labor productivity growth declined from 2.3% during 1973-1995 period to 1.5% during 1995-2006.

Reason for European Union productivity slowdown was due to slow emergence of knowledge economy in comparison to US and these were due to low growth contributions from investment in ICT(Information and Communication Technology), small percentage of share of technology based industries and slow multi factor productivity growth.

There were lots of reason for low labour productivity which were high payroll taxes, generous unemployment benefits, poor education and high unionization, expansion in European welfare states which caused high labour cost and also it caused increase in structural unemployment. one of the main reason for Europe's slow labour growth was due to rapid increase in capital growth and its substitution to labour due to rise in labor cost. Slow labour productivity growth was due to growth in labor input, labor market reform and decrease in long term unemployed people to work.

In comparison to this in US productivity growth was due to high productivity in information and communication technology equipment and capital investment in information and communication technology assets. In comparison to this growth of knowledge economy in Europe was much slower since 1995 than US.

As per 2015 statistics EU has combined GDP of 18.9 trillion Euro in comparison of 18.3 trillion Euro of US but if it is compared to 507 million population of Europe to 319 million population of US the. this statistics favours US

Between 1999 and 2008 both of EU and US's GDP growth per capita increased to 1.6%