Are We Going in the Right Direction? Inflation, Unemployment, and Productivity in Europe

Before the start of the EU, many had a vision of an economic nirvana that was about to fall within reach. It is all about the living standards of its people, growth, productivity, employment rates, and curbing inflation. Living standards refer to satisfaction with respect to what you can buy and the quality of life, and growth relates to how the economy is doing in comparison to others across the globe. But productivity, how much a worker can earn in an hour, is what determines whether a country is rich or poor, how fast it can grow, and the living standards of its people.
Growth in productivity is the biggest challenge in Europe. It is difficult to measure productivity because it is masked by changes in employment; productivity appears to go up in a recession as workers are laid off. Finding employment for low-skilled workers affects the figures, because these workers are the least productive.

Finding European statistics on productivity that are reliable can be difficult, but at least one thing is clear: Productivity of the European workforce in the business sector grew on average by 0.7 percent per year from 1999 to 2005, according to official estimates. Between 1996 and 2005, European productivity grew at only 1.4 percent annually, while the U.S. saw growth at 2.3 percent, according to figures published by The Conference Board. Britain’s productivity growth was above average at 2.1 percent, but has slowed during the past half-decade.

Because it is complicated to entangle cyclical from structural effects, we have to go by the similar indications and analogies of various publications showing some significant changes in productivity that may be sustainable for a number of years. First, through investment in information technology, Europe appears to be narrowing the “innovation gap” with the U.S. Second, corporate restructuring has led to more efficient working practices.

But the most important explanation may be developments in the labor market. Europe’s problem areas are regulation and competition in labor markets, product markets, and everywhere in between. It is a challenge to lay off or redeploy workers in order to increase efficiency. Meanwhile, a wall of national regulations inhibits proper competition throughout Europe, especially in the services arena.

But this is only part of the story in Europe. In southern Europe, a large rise in employment, mostly of its low-skilled workers, has depressed productivity growth. Higher employment is good news for the likes of Spain. But there are only so many surplus workers for whom to find jobs, and at some point, unless workers can start to produce more, growth will grind to a halt. In northern Europe, however, the story is different. Productivity growth in Germany has picked up, mainly because of an export boom, but this increase may yet prove to be cyclical.

The European Union’s member states must act on the “Lisbon Agenda” to improve competitiveness and then carry out still more domestic reform. This truly would be a step toward economic nirvana: achieving high and sustainable productivity growth.

Sources: FT, OECD, ECB, Eurostat.

Belgium	7.2%
Germany	6.4%
Ireland	4.0%
Greece	8.6 (Q1)
Spain	8.0%
France	8.6%
Italy	6.1% (Q1)
Luxembourg	4.9%
The Netherlands	3.3%
Austria	4.3%
Portugal	7.9%
Slovenia	5.1%
Finland	6.7%
U.K.	5.4% (April)
Sweden	5.3%
Denmark	3.55%
Poland	10.2 %

According to the Eurostat definition, unemployed people are those aged 15 to 74 who, following the International Labour Organisation (ILO) definition:
- are without work;
- are available to start work within the next two weeks;
- and have actively sought employment at some time during the previous four weeks.

The unemployment rate is the number of people unemployed as a percentage of the labor force. The labor force is the total number of people employed and unemployed.

Are We Going in the Right Direction? Inflation, Unemployment, and Productivity in Europe

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