How Can Europe Compete?

1
How Can Europe Compete?
Gavin Cameron University of Oxford
OUBEP Topical Economics 2006
2
the Lisbon Agenda

• UK and European policymaking with respect to
  economic growth is bound up with the EUs Lisbon
  Agenda Plan to make the EU the most dynamic and
  competitive knowledge-based economy in the world
  , by 2010.
• This talk outlines
• Europes relative performance GDP per capita,
  productivity, and labour utilisation
• The Lisbon Agenda Microeconomic Reforms and
  Employment Guidelines
• The simple economics of growth and jobs.
• Some suggested structural reforms.

3
living standards

• Economists use a number of different measurements
  of national income and productivity -the simplest
  is GDP per capita.
• More formally, though, GDP per capita is a
  function of productivity per hour and labour
  utilisation

GDP
Pop
GDP
Hour
Hours
Pop




4
Source Robert J Gordon (2005)
5
Source OMahony and Van Ark (2003), figure 1.1.
6
the sources of productivity growth

• Growth of labour productivity
• weighted growth of capital per worker hour
• growth of total factor productivity
• Growth of total factor productivity
• Higher quality products
• New varieties of products
• Better ways to use existing inputs

Capital
Hour
GDP
Hour
?
Total Factor Productivity
?
?




7
growth accounting
Output per worker (K/L)
Output per worker, Y/L
C
B
Output per worker, Y/L
A
A rise in technology raises the steady-state
level of output per capita. Part of this rise
(AB) is the pure effect of technical change
(TFP), the other part (BC) is due to ensuing
capital accumulation.
Capital per worker (K/L)
8
Source OMahony and Van Ark (2003), table 1.4b.
9
Source OMahony and Van Ark (2003), figure III.5
10
Source OMahony and Van Ark (2003), table III.14.
11
Source OMahony and Van Ark (2003), table III.5.
12
Source OMahony and Van Ark (2003), table II.7
13
(No Transcript)
14
labour utilisation

• Labour utilisation is captured by two broad
  elements.
• Labour intensity is the number of hours worked
  per worker.
• Employment rate is the proportion of the
  population that is in work.
• Government policies can affect both of these, for
  example, by setting maximum working hours or by
  making hiring firing more costly.

Active
Population
Hours
Worker
Hours
Population
Workers
Active





15
equilibrium employment
real wage
labour supply, Ls
wage-setting, WS
active workforce
labour demand, Ld
price-setting firms set a constant mark-up of
prices over costs, PS
involuntary
voluntary
employment
NAIRU
16
how to raise employment

• Need to target three groups voluntary
  unemployed, involuntary unemployed, and the
  inactive
• Reform of the benefit system, especially
  duration
• Limitations on union power no closed shops, no
  secondary picketing, secret ballots
• Changes to wage bargaining, especially increased
  employer-union coordination
• Tax reform (lower payroll taxes, minimum wages
  for the unskilled etc)
• Flexicurity Cuts to employment protection,
  coupled with active labour market policies
• Active Labour Market Policies training and work
  experience schemes for long-term unemployed,
  unskilled, youths, women, older workers
• Increased labour mobility.

17
how not to raise employment

• Cunning demand-side policies (unlikely to have
  much effect in the long-run, plus very
  expensive)
• Job-sharing or cuts in working hours
• Increased investment by firms (although this will
  raise wages)
• Protectionism (any benefit to workers massively
  outweighed by costs to consumers).

18
unemployment around the world
Source Faggio and Nickell (2006)
19
Source BIS (2006)
20
(No Transcript)
21
Lisbon Agenda reforms

• Microeconomic Reforms
• The Lisbon Agenda argues that the knowledge
  economy is vital to the future of Europe.
• It proposes that the EU should aim to spend 3 per
  cent of GDP on RD.
• But EU problems not just in the high-technology
  sector.
• Employment Guidelines
• Attract and retain employment through modernising
  social protection
• Improve adaptability of workers and firms and
  hence flexibility of labour market
• Increase investment in human capital (education
  and skills).
• But strong opposition in many countries to cuts
  in benefits and employment protection.

22
growth and jobs

• Labour Utilisation
• In the short to medium-run, aggregate employment
  in an economy is largely a function of
  macroeconomic policy. Evidence suggests that
  strong, balanced, growth tends to raise
  employment a little, but sectoral reallocation of
  labour may reduce employment a little.
• In the long-run, aggregate employment is mainly
  affected by the workings of the labour market.
• Productivity
• In the short to medium-run, rising employment may
  exert downward pressure on productivity and
  wages, especially if the newly employed are
  young, unskilled, female, old or are long-term
  unemployed (and hence have lower productivity
  than existing workers).
• In the long-run, increased capital accumulation
  will tend to offset this effect and there is
  little evidence of an effect of employment rates
  on growth. However, some factors that make
  employment outcomes worse (such as bad labour
  relations) may also be bad for growth.

23
Source OMahony and Van Ark (2003), table I.1.
24
Source OECD (2005)
25
Source OECD (2005)
26
summary

• Recent European economic performance has been
  weak
• This is particularly the case for labour
  utilisation.
• But also increasingly true for productivity
  growth.
• Weakness especially in agriculture,
  manufacturing, distribution and financial
  services.
• Strong in utilities, construction,
  communications.
• Lisbon agenda unlikely to help soon
• Too focussed on high-tech too little on low tech
  and job creation.
• European workers, especially the long-term
  unemployed unskilled, women, youths and older
  workers need pathways to work.
• Question marks over willingness of governments to
  implement agenda, and over ability of ECB and
  finance ministries to co-ordinate macroeconomic
  policy.
• But Europe is very diverse, so difficult to
  generalise!