European CEO Dialogue · and credit together helped Europe achieve its best growth performance...

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The GailFosler Group

European CEO Dialogue

Background Materials

15-16 January 2015

Swiss Re Centre for Global Dialogue

Rüschlikon, Switzerland

http://www.gailfosler.com/


The GailFosler Group European CEO Dialogue, 15-16 Jan 2015 Background Materials 2

Executive Summary

Europe’s economic performance has lagged much of the rest of the world in recent decades. More

recently, the global financial crisis and the follow-on European debt crisis has set it on an even

more disturbing path — with overall GDP levels today below 2007 levels.

Disappointing 2014 performance challenges the sanguine view that Europe will automatically

return to its growth trend since the introduction of the euro (post-1999). EU-151 GDP grew at only

about 1.2 percent in 2014, with Italy in recession and weak growth elsewhere. Indeed, if Europe

fails to break out of its recent pattern of fits and starts, it risks heading into its own “lost

decade.”

Europe’s unique economic and political realities argue against complacency. First, Europe has a

growing labor force with millions currently out of work, many of whom are among the young and

less well-educated. Declining populations in future decades may help mitigate the unemployment

issue, but demographic trends are not only an inadequate solution to the present problem; they

also present their own set of economic challenges going forward.

Second, income gaps between the EU-15 and the accession countries and the large unemployment

gaps within Europe create incentives for internal migration with attendant political tension.

Third, persistent economic weakness leaves Europe few degrees of freedom as it pursues its global

political interests and those of its allies. Moreover, the current course of economic growth

indicates that the Eurozone countries, which lie at the core of Europe, are likely to shrink further

relative to the rest — placing greater strains on internal Eurozone political structure.

The following PowerPoint presentation addresses a number of the dimensions of the European

growth challenge in order to provide an integrated view. The results show that Europe has many

levers to pull in creating a more dynamic economy — but almost all involve vision and political

commitment to deep structural reform on a scale comparable to the formation of the European

Union itself. Quantitative easing and infrastructure spending are not adequate to the task.

1 The EU-15 includes European Union member countries prior to the accession of ten candidate countries in 2004. The 15 countries are: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom.



Leveraging Europe’s Domestic Market

The most striking structural feature of the European economy is the overwhelming dominance of

trade as a growth driver. Exports and imports are each roughly equivalent to 40 percent of total

GDP, whereas investment and government spending are each about one-half as large. By contrast,

U.S. exports and imports are each about 10 percent of GDP.

Not only is trade large as a sector but it has been a major driver of economic growth in recent

years. In the early 2000s, increases in the EU trade surplus were a fundamental component of the

momentum that drove the economy toward the 2 to 3 percent growth rates that marked the pre-

global financial crisis years.

The corollary to the rising importance of external trade between EU and non-EU trading partners

is the declining share of intra-EU trade. Internal trade among EU-28 countries has declined as a

share of total trade from about 70 percent before the introduction of the euro to about 60

percent today.

The dominance of external EU trade is a stark contrast to the vision of the single market and the

single currency laid out in the April 1988 report, Europe 1992: The Overall Challenge (i.e., the

Cecchini Report). The reduction of intra-EU trade barriers was supposed to open up an internal

market of large scale and opportunity and would lead to the emergence of the first large, truly

European companies out of what were at the time national champions.

Rather, it appears that many barriers in the broad European playing field remain and that

individual EU members continue to protect the national character and presence of their major

multinationals. It may well be that the dominant effect of the adoption of the euro is to reduce

global transactions costs rather than to increase domestic price transparency, lower transactions

costs within Europe, and develop a dynamic single European market.

Trade, Domestic Innovation and Market Development

Much of the academic literature supports the notion of a tight relationship between trade and

economic growth. However, the performance of trade-dominated economies suggests that export-

driven growth does not produce the same vital consumer and investment sectors as economies

that have a more balanced structure between domestic and external activity.



Investment growth in the EU-28, for example, is suppressed relative to advanced economies in

which the trade sector is smaller — like the United States and the United Kingdom. So, too, is

inflation-adjusted consumer spending which rose only 2 percent a year in the years immediately

before the crisis on the back of meager gains in hourly wages.

Indeed, one could argue that innovation emerges at home and expands initially by leveraging the

income and scale of domestic markets. Exports are likely to be dominated by more established

sectors which, having exploited domestic markets, are looking for new markets abroad or cost

advantages to domestic production.

Credit and the Crisis

Worsening Europe’s growth challenge is the continuing decline in private credit creation that

drains the oxygen needed for Europe to grow. In the years leading up to the crisis, rising exports

and credit together helped Europe achieve its best growth performance since 2000.

Since 2007, European banks have been curtailing credit and public credit markets have not

stepped in to fill the gap. Credit is expanding elsewhere in the world, including in the United

States, although largely through corporate bond markets rather than bank lending. The U.S.

experience with quantitative easing (QE) shows that you can put reserves on bank balance sheets

through QE but you cannot make banks lend.

The “New” New Economy and Jobs

The new economy concept emerged in the 1980s to denote the notion that economic processes

reach transformational points at which production and markets operate in fundamentally different

ways. In the case of the 1980s, this transformational point was the emergence of the service

economy; in the late 1990s the term was synonymous with the tech boom.

The growth in the capital stock and the increase in capital intensity (i.e., capital stock per

worker) across all advanced economies is another one of these transformational points. Beginning

in the 1970s, advanced economies have been accumulating huge stocks of productive capital that

increasingly define how the economic process actually functions. Various forms of information and

communications technologies now infuse much of the capital base such that technology is no

longer a separate and distinct capital form but is a vital organ in most infrastructure and

equipment.



This capital intensity and ubiquitous presence of technology suggest there is a “new” new

economy emerging. The character of this capital-dominated economy is strikingly similar across

advanced economies, as is the rate of growth in capital intensity, particularly among Europe,

Japan and the United States.

The challenge from a jobs perspective is that if you reverse the relationship, the number of jobs

created for a given dollar unit of capital falls over time. For many advanced countries, $1 million

in capital stock is associated with only seven or eight jobs today, which in some cases is just half

as many as 20 to 30 years ago.

Moreover, the size and scale of the capital stock are changing business organizations — allowing

common functions to be taken over by specialists outside of the organization and helping to create

more diverse and often more specialized skill sets within the organization. These changes affect

the number and types of jobs that are available, the skills required and how they adapt over time,

and potentially even the mobility of workers in and out of the firm and within the firm itself.

Labor Market Response

European labor market participation rates remain low compared to much of the rest of the world,

including the United States, as do employment-to-population ratios. Neither shows any particular

secular tendency to rise even in good economic times.

Many European countries have employment-to-population ratios that are only about 50 percent —

well below the world and U.S. rates. Germany is an exception, where the employment-to-

population ratio is moving up, not because employment is growing as much as because population

growth is slowing. As a general matter, the labor share of income is also low and has fallen in

recent years.

From a global perspective, Europe grossly underutilizes its labor potential. Macro labor market

dynamics are reflected not in participation and employment rates but in relatively high

unemployment rates that are rising further as a result of the back-to-back crises.

Many of the unemployed are also young. The unemployment rate for young potential workers is at

least twice the overall unemployment rate in both Europe and the United States.



Equally striking is the rise in part-time workers relative to full-time workers in Europe and relative

to the United States. Labor laws have been eased in Europe to permit more part-time work. Spain,

Germany and the EU-15 as a group now all have a higher percentage of part-time workers than

does the United States.

The effects of the “new” new economy are evident both in the growth in part-time relative to

full-time work and in the widening wage gaps among sectors and professions. The hourly wage in

some sectors with large numbers of part-time workers — such as hotels, food service and

administration — is 30 to 40 percent lower than the average wage. By contrast, workers in

professional services, power generation, information technology and finance are paid wages that

are 30 to almost 60 percent higher (in the case of finance) than the hourly average. Inequality

does not originate solely in the executive suite; it is symptomatic of a new and permanent

economic transformation.

Demographics Are Not Destiny

Although demographics are a frequent excuse for poor European economic performance, the

trends are not that different from the rest of the world. European, Chinese and Japanese

populations will begin to decline in absolute numbers by 2030, and many advanced economies

have population growth rates that are less than 1 percent. Strikingly, emerging-market population

growth rates are declining sharply in all regions except for sub-Saharan Africa.

The growth challenge is about making use of the resources at hand. The prime working-age share

of the population (i.e., ages 25-54) in many advanced economies will begin to level out in 2030 in

the range of about 33 to 37 percent. A recent GFG (The GailFosler Group) report, Understanding

the Demographic Dynamics of Market Opportunity, showed that advanced countries like the

United States could effectively make up for diminishing demographic opportunity by increasing the

per capita incomes of the existing demographic base.

Dynamism and Economic Growth

Dynamism demands change. Successful change requires growth. More dynamic economies where

sectors emerge and recede and workers move in and out of jobs and sectors are often higher

growth economies.



Dynamism and growth interact, but one does not automatically lead to the other. Economies need

a rising tide in terms of growth momentum to raise the majority of boats. Growing firms and

establishments add workers almost in exact proportion to their growth rates. Very rapid growth

inspires very rapid job gains; the opposite is also true.

In advanced economies, however, net job gains in most firms/establishments hover around zero,

with small job gains in good times and small losses in bad times. Moreover, the capital intensity of

the economy as described above tends to absorb labor demand when growth rates are low and

inconsistent.

Over time, economies build in rigidities that raise the costs of separating workers and, by

implication, the costs of hiring them. Also, as societies age, there is less churn among jobs,

workers stay in place longer, and there are fewer opportunities to move up — although increased

retirements do offer some limited opportunities. Growth increases churn because it opens

opportunities for promotions and provides the resources for workers to move into retirement.

U.S. academic research shows that the young and less-educated suffer most when labor market

dynamism diminishes because they represent a large share of the job-seekers and their average

tenure in a job is lower. The relative rise in European youth unemployment suggests similar results

for Europe.

Overall, European job reallocation rates (i.e., numbers of jobs created and jobs destroyed as a

share of total employment) are much lower than in the United States. However, in many

countries, job reallocation rates appear to be holding steady or rising compared to the United

States, where reallocation rates have fallen slowly but consistently over time. European labor

market liberalization and a steady decline in the unionized share of the workforce may be having

an effect.

Epilogue: The Need to Think Big

The preceding discussion points to the need to think about economic structure and policies on a

much more strategic basis than is common either in Europe or the United States. One can argue

that growing capital intensity is in direct competition with workers and worker opportunities.

Dynamism in both labor and product markets help to shift resources toward higher growth and

better performing sectors, but these reallocations are only effective when growth is sufficient to

provide enough positive opportunities.



Macroeconomic policy tends toward the practice of incrementalism with mostly known tools. In

Europe, in particular, even the most recent policy approaches to the euro and the European Union

have tended to focus on tactical approaches rather than whether actions taken are equal to the

scale of the opportunity as originally conceived in the single market vision.

Most advanced economies find themselves facing a growth conundrum that intensifies issues of

inequality of opportunity and results. Liberalization that provides less job security requires that

there be a significant probability of a better job opportunity to which to move or opportunities

become more concentrated. In short, macroeconomic management with modest growth and

structural objectives is not likely to change the status quo.

The United States and Europe have some issues in common and others that are different. The

overarching challenge they share is too few opportunities for too few people to enhance their

labor income in the formal economy, opportunities that are too concentrated in a few high-skill

sectors/professions, and too little opportunity to accumulate personal capital assets along the

way. All of these forces fuel an inexorable increase in inequality and political and social tension.

Finding effective solutions will require the appetite for thinking bigger and more broadly, on both

sides of the Atlantic, than is evident heretofore. Hopefully, the ensuing discussion will put us on

that path.


15-16 January 2015Swiss Re Centre for Global Dialogue

Rüschlikon, Switzerland


The GailFosler Group LLCEuropean CEO Dialogue

15-16 January 20152


Economic performance drives global standing and internal EU income gaps

EU-28 economy will diminish relative to the U.S. economy; global share will shrink at an even faster rate on current path

Eurozone is shrinking as a share of EU-28; large gaps with other-EU countries persist

Europe is underleveraging domestic market opportunity

European economy is export-driven, advantaging old sectors over new ones

Much of the single-market vision remains unrealized

Declining private credit creation is worsening an already significant growth challenge

Size and technology of capital stock are changing how the economy works

Capital intensity increases the importance of growth for dynamic labor markets

EU demographics are not the enemy of good economic performance

Labor market rigidities are most harmful to the young and less well-educated

Labor market liberalization without strong formulas for structural growth will likely destroy more jobs than it creates

Executive Summary


15-16 January 20153

Europe has underperformed for most of last 20 years

Gauging European Economic Performance

The United States has grown faster than Europe – especially since 2007 (see Slide 37: Appendix A for EU regional definitions)

Debt crisis has held Europe back even relative to Japan in recent years

European Union (EU-28) has outperformed EU-15 and Eurozone but only by a small margin – even though it benefits from faster growth in Central and Eastern Europe (CEE)

Momentum in EU-Other (CEE and other small EU countries) has slowed post-2007

100

110

120

130

140

150

160

170

180

Per

cen

t G

row

th

GDP Growth Index

EU-Other*

United States

EU-28

EU-15

Eurozone

Japan

Sources: Japan Cabinet Office, Eurostat*Includes countries in EU-28 but not in EU-15


15-16 January 2015


Poor performance alters relative standing Eurozone economy was 76 percent of EU-28 total in 1999 and is 74 percent today; it will

fall toward 70 percent by 2025 unless growth moves above its post-1999 trend

The United States, which was only 13 percent larger than the Eurozone in 1999, is 26 percent larger today

The U.S. economy will nearly eclipse the EU-28 by 2025 if post-1999 growth trends continue

4

8,000,000

9,000,000

10,000,000

11,000,000

12,000,000

13,000,000

14,000,000

15,000,000

16,000,000

Mill

ion

s C

hai

ned

20

10

Eu

ros

GDP, Post-1999 Trend Projections

EU-28

United States

EU-15

Eurozone

Sources: Eurostat, The GailFosler Group

Forecast

Note: Dotted lines represent a continuation of post-1999 trends


15-16 January 20155


Per capita incomes among different EU regions will begin to converge, but gap with the United States will widen

At post-1999 trends, Eurozone and EU-Other living standards will converge in 2032

Reducing income gaps reduces the motivation for labor migration within EU

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

Co

nst

ant

20

11

PP

P In

tern

atio

nal

Do

llars

GDP per Capita, Post-1999 Trend Projections

United States

EU-15

Eurozone

EU-28

EU-Other

Forecast

Note: Dotted lines represent a continuation of post-1999 trends Sources: The World Bank, The GailFosler Group

Gaps in relative living standards will remain large


15-16 January 20156

Implications of post-2009 performance are more dire Multiple crises and uneven recoveries put Europe on a path to its own “lost decade”

At post-2009 trend growth rates, EU-28 GDP would be only 10 percent higher in 2025 than it is today

The U.S. economy would surpass the EU-28 economy in 2019


8,000,000

9,000,000

10,000,000

11,000,000

12,000,000

13,000,000

14,000,000

15,000,000

16,000,000

Mill

ion

s C

hai

ned

20

10

Eu

ros

GDP, Post-2009 Trend Projections

United States

EU-28

EU-15

Eurozone

Sources: Eurostat, The GailFosler Group

Forecast

Note: Dotted lines represent a continuation of post-2009 trends


15-16 January 20157

U.S. and EU hurt in relative terms by economic crises


Financial and debt crises and aftermath have accelerated relative emerging market gains

Lagging EU-28 has begun to look like Japan in recent years

Japan’s economy is only 15 percent larger than in 1995; China’s is about five times larger

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Bill

ion

s C

on

stan

t 2

01

1

PP

P In

tern

atio

nal

Do

llars

GDP

EU-28

United States

China

India

Japan

EU-Other

Source: The World Bank


15-16 January 20158

Will changing global GDP shares affect influence? Both Europe and the United States are shrinking as a share of global GDP; Europe’s

relative decline has worsened since the 2007 crisis

Emerging markets’ relative advance is due mostly to China’s rapid ascent

China’s GDP was 75 percent of Japan’s in 1995; now it is nearly four times larger

Geopolitical standing adds to domestic pressures to adopt growth strategies (i.e., Japan)


0%

10%

20%

30%

40%

50%

60%

70%

Shar

e o

f G

lob

al G

DP

(2

01

1 P

PP

Inte

rnat

ion

al D

olla

rs)

Shares of Global GDP

Advanced

Emerging

Advanced less EU-15

Emerging less China

United States

China

EU-15

Japan



15-16 January 20159

Despite internal market rationale, EU growth is externally driven by a large trade sector

EU-28’s export-driven economic structure looks a lot like Japan’s

Domestic investment pays a big price — EU-28 investment remains 14 percent below 2007 peaks; Japanese investment is 7 percent lower despite recent pro-growth push

More government spending does not offset investment losses, as Japan’s case shows

Understanding Europe’s Growth Drivers

European growth depends on external markets

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

Bill

ion

s C

hai

ned

20

10

Eu

ros

EU-28 GDP by Sector

Note: Dotted Lines represent post-1999 trendlines

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

130,000

Bill

ion

s C

hai

ned

20

05

Yen

Japan GDP by Sector

Gross FixedCapitalFormation

GovernmentConsumption

Exports

Imports

Sources: Eurostat, Japan Cabinet Office


15-16 January 201510


Exports are three to four times larger in levels and as a share of GDP in Europe than in the United States

Can high-income economies with large social welfare systems successfully translate export success into domestic economic success?

How does trade benefit domestic business development, investment and innovation?

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

Mill

ion

s C

hai

ned

20

10

Eu

ros

Exports

Note: Dotted lines represent post-1999 trendlines

0%

10%

20%

30%

40%

50%

60%

70%

Shar

e o

f G

DP

Exports as a Share of GDP

EU-Other

Eurozone

EU-28

EU-15

UnitedStates

Source: Eurostat

U.S. and EU differ markedly in external market role


15-16 January 201511

Domestic market competition and innovation, increasing scale of new “European” companies and job growth were among expected benefits of a single market/currency

Instead, the share of internal EU trade has declined and external trade has increased

Companies retain national identities; competitive and financial barriers persist; euro reduces global transactions costs and opens global markets as preferred route to growth

20%

30%

40%

50%

60%

70%

80%

Inte

rnal

an

d E

xter

nal

Sh

ares

of

Trad

e

Internal vs. External Shares of Trade, EU-28

Intra-EU-28Import Share

Intra-EU-28Export Share

Extra-EU-28Export Share

Extra-EU-28Import Share

Source: Eurostat

Single market and euro have unintended effects



15-16 January 201512

Economic crises are not only macroeconomic events — they have structural implications

U.S. and European investment are on opposite paths; the United States is recovering while Europe continues to decline

2014 investment performance will further widen the gaps between the United States and EU

EU-Other investment is too small to have much overall EU market impact

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

Mill

ion

s C

hai

ned

20

10

Eu

ros

Gross Fixed Capital Formation


17%

18%

19%

20%

21%

22%

23%

24%

25%

26%

27%

Shar

e o

f G

DP

Gross Fixed Capital Formation as a Share of GDP

EU-Other

Eurozone

EU-28

EU-15

UnitedStates

Source: Eurostat


Back-to-back crises have devastated EU investment


15-16 January 201513

Business investment hit hard by economic crises Business investment has been hit hard by recent crises — down by 12 percent since

2008

Still, unlike Japan, many of the gains of the past 15 years have been retained

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

2,200,000

2,400,000

Mill

ion

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hai

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20

10

Eu

ros

Business Investment

EU-28

EU-15

Eurozone

Source: Eurostat

Note: Business Investment equals non-residential investmentDotted lines represent post-1995 trendlines



15-16 January 201514

By comparison, real estate decline is unrelenting Europe had its own mini-real estate boom — and now bust

Residential real estate investment is down 23 percent from 2007 peak

U.S. real estate decline was deeper (nearly 45 percent); sector also remains depressed

400,000

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600,000

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700,000

750,000

800,000

Mill

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20

10

Eu

ros

Residential Investment

EU-28

EU-15

Eurozone

Source: EurostatNote: Dotted lines represent post-1995 trendlines



15-16 January 201515

Europe is deleveraging while credit grows elsewhere Private credit is growing in the United States, China and Japan – though in the United

States largely outside the banking system

Europe’s banks continue to curtail credit; credit markets remain underdeveloped

Quantitative easing will not reverse the effects of deleveraging of this magnitude

-20

-10

0

10

20

30

40

Per

cen

t G

row

th

Credit Growth by Region

China

United States

Japan

World

EU-15




15-16 January 201516

Government spending continues at high levels Government sector in Europe is much larger than in the United States

Large government sectors can weigh on domestic market dynamics — subjecting large share of economic activity to social/political criteria rather than market standards

Effect of the debt crisis has been to stall growth in government but not reverse it

Government spending is declining in absolute dollars in United States; more importantly, the private sector accounts for nearly all U.S. post-financial crisis economic and job gains


1,600,000

1,800,000

2,000,000

2,200,000

2,400,000

2,600,000

2,800,000

3,000,000

Mill

ion

s C

hai

ned

20

10

Eu

ros

Government Consumption

EU-28

EU-15

Eurozone

United States



15-16 January 201517

Consumer spending lags across Europe Consumers reflect economic growth, job and income gains and confidence in the future

Consumer spending provides important market validation for innovation and investment

Consumer spending in Europe has grown only about 11 percent since 2002

The U.S. consumer is overleveraged at times but is also critical to a dynamic market


4,500,000

5,000,000

5,500,000

6,000,000

6,500,000

7,000,000

7,500,000

8,000,000

8,500,000

Mill

ion

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hai

ned

20

10

Eu

ros

Private Consumption

United States

EU-28

EU-15

Eurozone



15-16 January 201518

Capital intensity is rising in all countries Capital is rising relative to labor as a dynamic force in the production process

Competitive dynamics and regulatory requirements often require capital-based solutions to product quality, logistics, environmental control and recycling

Capital intensity (capital stock per worker) grows about 3.5 percent a year in the United States — rates are similar in Europe

Investment must grow faster than in the past because, in addition to offsetting depreciation, a larger capital stock is needed to provide significant employment gains

Operating in a “New” New Economy

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Co

nst

ant

20

00

PP

P

U.S

. Do

llars

per

Wo

rker

Capital Intensity

Japan

Spain

United States

France

Sweden

Germany

United Kingdom

Sources: The Conference Board, International Labour Organisation


15-16 January 201519

Technology is a growing share of investment “Smart” capital transforms the what, how, when and who of the production process

IP products and ICT equipment make up nearly 50 percent of the growth in business investment since 1995


200,000

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300,000

350,000

400,000

450,000

500,000

550,000

600,000

650,000

Mill

ion

s C

hai

ned

20

10

Eu

ros

IP Products and ICT Equipment Investment


20%

22%

24%

26%

28%

30%

32%

Per

cen

t Sh

are

IP Products and ICT Equipment Share of Total Investment

EU-15

EU-28

Eurozone

Source: Eurostat


15-16 January 201520

The nature of business and markets is changing as are opportunities for workers

For some countries like France and Spain, $1M of capital stock supports only about one half the number of jobs it did in the mid-1980s

GFG research shows that U.S. business investment growth would have to accelerate even further from an estimated 7 percent in 2014 to reach full employment and return labor force participation rates to more dynamic pre-2007 levels

6

8

10

12

14

16

18

20

Wo

rker

s p

er $

1 M

illio

n C

apit

al S

tock

Employment Intensity

United Kingdom

Sweden

Germany

France

United States

Spain

Japan

Sources: The Conference Board, International Labour Organisation, The GailFosler Group

A given level of investment creates fewer jobs today



15-16 January 201521

EU labor market participation is stable to rising EU labor force participation rate (LFPR) is low relative to world levels but generally

stable

Spain’s LFPR has risen by almost 10 percentage points since 2001

U.S. participation rates are headed down – could they decline to European levels?


45

50

55

60

65

70

Per

cen

t

Labor Force Participation Rate (15 and over)

World

United States

United Kingdom

Germany

Spain

EU-28

Eurozone

France

Italy



15-16 January 201522

Job growth has underperformed in Europe and U.S. Employment-population ratios have been falling steadily since the crisis in most of

Europe and in the United States

Spain’s employment-population ratio has fallen by nearly 10 percentage points since 2007 even with higher labor force participation

Germany is on an opposite track, improving toward U.S. levels over the last 10 years but more as a result of low population growth than higher job growth


35

40

45

50

55

60

65

Per

cen

t

Employment-Population Ratio (Ages 15+)

World

United States

United Kingdom

Germany

EU-28

France

Eurozone

Spain

Italy



15-16 January 201523

Unemployment is rising throughout most of Europe EU unemployment rate tops 10 percent and is still rising

Spain’s unemployment rate is 25 percent — more than double next highest (Italy)

Many countries, including the United States, have youth unemployment rates that are two to three times the total unemployment rates; Germany is an exception


0

10

20

30

40

50

60

Per

cen

t

Youth Unemployment Rates (Under Age 25)

Spain

Italy

France

EU-15

United Kingdom

United States

Germany

Source: Eurostat

0

5

10

15

20

25

30

Per

cen

t

Total Unemployment Rates


15-16 January 201524

Shift from full-time to part-time work is striking Since 1995, the share of part-time workers has risen by eight percentage points in EU-15

to almost one quarter of total employment

Spanish and Italian part-time shares have doubled over the last 10 years

The share of part-time workers is lower and share of full-time workers is higher in France and the United States than in the EU-15 as a whole


5%

10%

15%

20%

25%

30%

Part-time Share of Total Employment

70%

75%

80%

85%

90%

95%

Full-time Share of Total Employment

Spain

Italy

France

United States

EU-15

United Kingdom

Germany

Sources: Eurostat, Bureau of Labor Statistics


15-16 January 201525


Wage gaps have widened across almost all industry and occupation groups since 2000

Largest gaps are in power and financial services (50 to 60 percent higher than industry average) and leisure and administrative (30 to 40 percent below average)

-60% -40% -20% 0% 20% 40% 60%

Financial and insurance activities

Electricity, gas, steam and air conditioning supply

Information and communication

Professional, scientific and technical activities

Mining and quarrying

Manufacturing

Education

Real estate activities

Public administration and defence; compulsory social security

Human health and social work activities

Construction

Arts, entertainment and recreation

Transportation and storage

Other service activities

Water supply; waste management and remediation activities

Wholesale and retail trade; repair of motor vehicles and motorcycles

Administrative and support service activities

Accommodation and food service activities

Differentials From Total Economy Wage and Salary Costs by Sector, 2000 vs. 2012

2000*

2012

*Some sector data not available in 2000

€ 21.41

Industry Average Wage and Salary Hourly Cost

€ 16.83

Source: Eurostat

Wider wage gaps in EU foster wider income gaps


15-16 January 201526

Labor costs don’t explain differences in labor demand France has one of the highest hourly labor costs but has solid relative employment

growth and large share of full-time workers

Spain has relatively low labor costs but has rampant unemployment

U.S. labor costs are similar to EU-28 labor costs; relative employment rates are higher


0

5

10

15

20

25

30

35

40

EU-28 Eurozone Germany Spain France Italy UnitedKingdom

UnitedStates*

Euro

s p

er H

ou

r

Total Hourly Labor Costs

2008 2013

Sources: Eurostat, Bureau of Labor Statistics*U.S. data may differ slightly in methodology


15-16 January 201527


All advanced economies provide significant social welfare payments in the workplace

These payments are becoming more commonplace in emerging markets

76% 74% 78% 73% 68% 72%85%

69%

24% 26% 22% 27% 32% 28%15%

31%

0%

20%

40%

60%

80%

100%

EU-28 Eurozone Germany Spain France Italy UnitedKingdom

UnitedStates*

Shares of Total Labor Costs by Country (Industry, Construction and Services)

Wages and Salaries Employer's Social Contributions and Other Labor Costs

Source: Eurostat*U.S. data may differ slightly in methodology

Social payments are similar in the U.S. and EU


15-16 January 201528

Population growth is slowing across all countries/regions

U.S. population growth remains relatively stable near global average rates

EU population growth is among lowest in the world; total population will begin to decline around 2030

Demographic Dimensions of Dynamism

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Per

cen

t G

row

th

Population Growth

Sub-Saharan Africa

United States

World

India

Latin America

EU

China

Japan

Source: U.S. Census

EU, China and Japan populations set to shrink fastest


15-16 January 201529

Prime working-age populations are key to market opportunity

Despite differences in population growth and aging, prime working-age shares of total population in the United States and Europe hover between 40 and 43 percent

Shares will continue to move in tandem – declining through 2030 then flattening out to 2050 within a range of 34 percent (Germany) to 37 percent (United States)


25%

30%

35%

40%

45%

50%

Pri

me

Shar

e o

f th

e P

op

ula

tio

n

Prime Working-Age (25-54) Share of the Population

India

World

United States

United Kingdom

France

China

Germany

Japan

Source: United Nations

Prime working-age population shares converge


15-16 January 201530


Economic performance trumps demographics in determining domestic market opportunity in most advanced economies

Prime urban markets are determined by the size of prime working-age urban population and per capita income growth; income growth is most important to advanced economies

Poor relative income growth shrinks Europe’s internal market potential as well as its relative global share of major prime urban markets (see Slide 38: Appendix B for further definitions)

Economic performance drives market opportunity

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

Mill

ion

s C

on

stan

t 2

00

5 U

.S. D

olla

rs

Prime Urban Market Comparison

United States

China

EU

Japan

India

Sources: U.S. Census, United Nations, The World Bank, The GailFosler Group


15-16 January 201531

Between 2000 and 2008, total EU-28 employment rose by more than 16 million (8 percent growth) while U.S. employment rose by just 5 million (4 percent growth)

The United States lost many more jobs during the crisis, but its performance since 2009 widely outpaces the EU

Dynamism Dilemma

125,000

145,000

165,000

185,000

205,000

225,000

245,000

Tho

usa

nd

s

Total Employment

EU-28

EU-15

United States

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Per

cen

t G

row

th

Total Employment Growth

EU-28

EU-15

United States

Sources: Eurostat, Bureau of Economic Analysis

Dynamism demands change in economic systems


15-16 January 201532

Dynamism Dilemma

Since 2009, the United States has reversed job losses in most sectors except construction (cyclical) and information technology (secular)

Relative to the EU-28, job gains have been much better in what has been a lackluster growth environment until recently

Economic growth and job flexibility interact to improve employment performance

-15 -10 -5 0 5 10 15

Total

Professional and other services

Real estate activities

Arts, entertainment and recreation

Information and communication

Wholesale/retail trade, transport, accommodation, food services

Financial and insurance activities

Construction

Manufacturing

Agriculture, forestry and fishing

Percent Growth

Total Employment Growth, 2009-2013 (EU vs. United States)

United States

EU-28

Sources: Eurostat, U.S. Bureau of Economic Analysis

U.S. jobs have returned in many sectors since 2009


15-16 January 201533

Dynamism Dilemma

U.S.-based academic research on job flows at firm and establishment levels provides deep insight into job market dynamism (see Slide 38: Appendix B for definitions)

Expanding firms offer big labor market opportunities

When employer growth rates hover around zero, hires and separations decline and dynamism suffers

Firm growth is closely linked to job creation

0

20

40

60

80

100

-80 -60 -40 -20 0 20 40 60 80Hir

es a

nd

Sep

arat

ion

s, P

erce

nt

of

Emp

loym

ent

Establishment-Level Employment Growth, Percent of Employment

Cross Sectional Relationship Between Worker Flows and Job Flows

Hires

Separations

45 Degree Line

Source: Haltiwanger, Davis, Labor Market Fluidity and Economic Performance, NBER Working Paper


15-16 January 201534

Job and worker reallocation among firms have declined in the United States since 1990

Reasons include: aging workforce, specialized skills, certification requirements, shifts away from small/young firms, increasing scale and capital structure, especially in service industries that fostered small/young firms in the past

Labor market practices, including employer-provided benefits, high costs of recruitment and separation, and decline in at-will employment also have an effect

U.S. labor market has become less dynamic

Dynamism Dilemma

10

15

20

25

30

35

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Per

cen

t o

f To

tal E

mp

loym

ent

Quarterly Rates of Job Reallocation, Worker Reallocation and Job Churn, U.S. Nonfarm Private Sector

Worker Reallocation (Hirings plus Separations)

Job Churn (Worker Reallocation less Job Reallocation)

Job Reallocation (Job Creation less Job Destruction)

Source: Haltiwanger, Davis, Labor Market Fluidity and Economic Performance, NBER Working Paper

Note: Shaded areas represent recessions


15-16 January 201535

Dynamism Dilemma

Job and worker reallocation rates vary widely across countries according to OECD data

In the United States and United Kingdom, hiring and separation rates each approach 25 percent of total employment; flows are half these rates in some European countries

Labor market liberalization alone is likely to lead to net job destruction if not combined with strong formulas for structural growth

Declining job flows adversely affect women, the young and the less well-educated

U.S. and U.K. job markets are more dynamic than EU

0

5

10

15

20

25

30

35

Per

cen

tage

of

Tota

l Em

plo

ymen

t

Gross Worker Reallocation Rates in OECD Countries, 2000-2007*

Hiring Rate Separation Rate

Source: The Organisation for Economic Co-operation and Development*Actual years vary by country


15-16 January 201536

Conclusion

Dynamism issues go deep and are not amendable to tactical solutions

Capital intensity and organizational innovation supplant jobs even at moderate real growth rates (i.e., 2 percent)

Quantitative easing and public infrastructure are an insufficient response to dynamism issues

Export-driven growth leads to over-reliance on “old” sectors — innovation emerges in a dynamic domestic marketplace

“Smart” capital divides up work to reduce labor share, segments high vs. low skills, shifts activity mix inside/outside the firm, and widens wage gaps

Reduced labor-market churn decreases job opportunities, especially for young

Required financial returns and shareholder activism accelerate pace of business restructuring and can lead to job losses, increase capital income, and widen income gaps

Implications


15-16 January 201537

Appendix A

EU-28: Current member states of the European Union

Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom

EU-15: Member states prior to large scale accession in 2004

Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom

Eurozone: Member states that have adopted the euro

Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Spain

EU-Other: Non-EU-15 Member states that have acceded to the EU since 2004

Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, Slovenia

Europe Regional Definitions


15-16 January 201538

Appendix B

Prime Urban Economy: Prime working-age share of urban population x urban population x GDP per capita

Job creation rate: sum of employment gains at new and expanding establishments as a percentage of total employment

Job destruction rate: sum of employment losses at exiting and shrinking establishments as a percentage of total employment

Job reallocation rate: sum of job creation rate and job destruction rate

Worker reallocation rate: sum of hires and separations as a percentage of total employment

Job churn/excess worker reallocation rate: worker reallocation rate less job reallocation rate (i.e., excess worker flows above amount required to accommodate job flows)

Other Definitions

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