Robert J. GordonRobert J. Gordon

Talk at Industry Canada, Talk at Industry Canada,

Ottawa, Ottawa,

November 19, 2004November 19, 2004

Why Was Europe Left Why Was Europe Left at the Station when theat the Station when theAmerican Productivity American Productivity Locomotive Departed?Locomotive Departed?

Ultimate Measure of Ultimate Measure of Economic SuccessEconomic Success

Standard of Living = Income per capitaStandard of Living = Income per capita– 1.3% growth, doubles every 53 years 1.3% growth, doubles every 53 years

(Philippines)(Philippines)– 5.6% growth, doubles every 12 years 5.6% growth, doubles every 12 years

(Korea)(Korea) For very long-term growth or comparing For very long-term growth or comparing

rich and poor nations, Income per capita rich and poor nations, Income per capita and productivity are the same thingand productivity are the same thing

Not the same thing for short-term or Not the same thing for short-term or comparisons among rich nationscomparisons among rich nations

How Productivity is Related to Output per Capita

Output (Q) Equal to the product of: Productivity (Q/A) Hours per Employee (A/E) Employment Rate (E/L),

that’s just (1 – U/L) Labor-force Participation

Rate (L/N) Working-age Population

(N)

N

L

L

E

E

A

A

Q

N

Q

How Could Europe be So Productive Yet So Poor

Output per Capita (Q/N)In Europe 75% of U. S.Productivity 95% of U. S.The Difference:

Hours per Employee (A/E) Employment Rate (E/L) Labor-force Participation

Rate (L/N)

N

L

L

E

E

A

A

Q

N

Q

Europe vs. the U. S. Europe vs. the U. S. since 1870since 1870

The History: Europe falls back 1870-The History: Europe falls back 1870-1950 and then catches up1950 and then catches up

The catch-up is almost complete in The catch-up is almost complete in productivity (Q/A)productivity (Q/A)

The catch-up is incomplete in output The catch-up is incomplete in output per capita (Q/N)per capita (Q/N)

Why?Why?– Must be that Europe’s A/N is lowerMust be that Europe’s A/N is lower– Why?Why?

Per Capita Real GDPPer Capita Real GDPper Capita Real GDP, Europe and the United States,

Selected Years, 1820-2000

1000

10000

100000

1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Co

nst

ant

1990

Gea

ry-K

ham

is D

olla

rs

United States

Europe

Essential Features of Essential Features of Income per Capita since Income per Capita since 18701870 Steady rate of real GDP per capita growth Steady rate of real GDP per capita growth

in the USin the US– 1.81% per year growth between 1870-20001.81% per year growth between 1870-2000– Huge acceleration between 1963-73Huge acceleration between 1963-73

Slower growth in EuropeSlower growth in Europe– 1.67% per year growth between 1870-20001.67% per year growth between 1870-2000– Downward dislocations due to the World WarsDownward dislocations due to the World Wars– Golden years of catch-up between 1950-1973Golden years of catch-up between 1950-1973

Since 1973 catch-up is incompleteSince 1973 catch-up is incomplete

Real GDP per HourReal GDP per HourReal GDP per Hour, Europe and the United States,

Selected Years, 1870-2000

1

10

100

1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Co

nst

ant

1990

Gea

ry-K

ham

is D

olla

rs p

er H

ou

r

United States

Europe

Summarizing the Summarizing the Productivity RecordProductivity Record U.S. record of productivity growth is U.S. record of productivity growth is

not as steady as for output-per-capitanot as steady as for output-per-capita– Strongest performance between 1938-50Strongest performance between 1938-50– Slowdown between 1973-92Slowdown between 1973-92

Europe plays catch-upEurope plays catch-up– Much slower growth than the U.S. between Much slower growth than the U.S. between

1870-1950 (1.50% vs 2.15% for the US1870-1950 (1.50% vs 2.15% for the US– Nearly closes the gap by 2000Nearly closes the gap by 2000

In this section we’re ignoring the new In this section we’re ignoring the new divergence after 2000divergence after 2000

Output per CapitaOutput per Capitaand Output per Hourand Output per Hour

Ratio of Europe to the United States, Output per Capita and Output per Hour,

selected years, 1820-2000

40

50

60

70

80

90

100

110

1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Per

cen

t

Output per Capita

Output/Hour

Features of the Output Features of the Output per Capita, per Capita, Europe/U.S. ratioEurope/U.S. ratio

The Europe/U.S. ratio of output The Europe/U.S. ratio of output per capita declines steadily from per capita declines steadily from 1829 to 1950.1829 to 1950.

Upsurge from 1950-1973Upsurge from 1950-1973 Stagnation between 1973-2000Stagnation between 1973-2000

Europe/U.S. ratio for Europe/U.S. ratio for productivity growthproductivity growth The same downward slide The same downward slide

between 1870 and 1950between 1870 and 1950 Europe has a higher level of hours Europe has a higher level of hours

per capitaper capita After 1950 much faster growth in After 1950 much faster growth in

the productivity ratiothe productivity ratio

Real GDP per Capita and Real Real GDP per Capita and Real GDP per HourGDP per Hour

  

 1820-70

 1870-1913

 1913-1929

 1929-1950

 1950-1973

 1973-2000

  Output per Capita

 

  

  

  

  

  

  Europe

 1.05

 1.25

 0.97

 0.79

 3.61

 1.77

  U. S.

 1.29

 1.79

 1.65

 1.55

 2.40

 1.64

  Europe - U. S.

 -0.24

 -0.54

 -0.68

 -0.76

 1.21

 0.13

  Output per Hour

  

  

  

  

  

  

  Europe

 

 1.49

 1.76

 1.35

 4.44

 2.40

  U. S.

 

 1.90

 2.40

 2.48

 2.68

 1.37

  Europe - U. S.

 

 -0.41

 -0.64

 -1.13

 1.76

 1.03

  YpC / YpH

  

  

  

  

  

  

  Europe

  

 -0.24

 -0.79

 -0.56

 -0.83

 -0.63

  U. S.

  

 -0.11

 -0.75

 -0.93

 -0.28

  0.27

  Europe - U. S.

  

 -0.13

 -0.04

 0.37

 -0.55

 -0.90

The Contributions of E/N The Contributions of E/N and H/Eand H/E

Ratio of Europe to the United States, Ratio of Output per Capita to Output per Hour, Decomposed into Hours/ Employee and Employee/Population Ratios, selected

years, 1870-2000

80

90

100

110

120

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Pe

rce

nt

Output PC/Output PH

Hours/Employee

Employees/Population

Standard of living: Standard of living: held down by held down by vacations (H/E)vacations (H/E) Have citizens chosen to use their Have citizens chosen to use their

prosperity to take longer prosperity to take longer vacations in contrast to vacations in contrast to Americans? Americans?

Have Europeans been forced to Have Europeans been forced to take vacations because of union take vacations because of union or parlimentary politics?or parlimentary politics?

Europe’s Low E/N Europe’s Low E/N Matters as much as Low Matters as much as Low H/EH/E High UnemploymentHigh Unemployment

– High Youth UnemploymentHigh Youth Unemployment– High long-term UnemploymentHigh long-term Unemployment

Low Labor-force ParticipationLow Labor-force Participation– Of YouthOf Youth– Of ElderlyOf Elderly

Poor Labor-Market Poor Labor-Market Performance in EuropePerformance in Europe

Why is Average EU Why is Average EU Unemployment Rate Higher than Unemployment Rate Higher than US, LFPR Lower?US, LFPR Lower?

Minimum Wages, U BenefitsMinimum Wages, U Benefits Regulations on Hiring, Firing, Plant Regulations on Hiring, Firing, Plant

Closings, Plant OpeningsClosings, Plant Openings Prescott blames it all on taxesPrescott blames it all on taxes This is an old Story, still validThis is an old Story, still valid

Phelps’ Refreshing Phelps’ Refreshing departure from departure from VaguenessVagueness Too little competition, too much Too little competition, too much

corporatismcorporatism ““penalties, impediments, prohibitions, penalties, impediments, prohibitions,

mandates” that dampen “creative mandates” that dampen “creative destruction”destruction”

Youth in America vs. Europe, culture of Youth in America vs. Europe, culture of “dependency”“dependency”

American teens work at McDonalds, American teens work at McDonalds, pay part of their college expensespay part of their college expenses

Those Italian men!Those Italian men!

Do the Official Numbers Do the Official Numbers Overstate U. S. Overstate U. S.

Advantage?Advantage? GDP Exaggerates U. S. GDP per CapitaGDP Exaggerates U. S. GDP per Capita

– Extreme climate, lots of air conditioning, Extreme climate, lots of air conditioning, low petrol prices, huge excess energy uselow petrol prices, huge excess energy use

– U. S. urban sprawl: energy use, congestionU. S. urban sprawl: energy use, congestion– Crime, 2 million in prisonCrime, 2 million in prison

U. S. Medical Care InefficiencyU. S. Medical Care Inefficiency– Raises Business CostsRaises Business Costs– Inefficiency, InsecurityInefficiency, Insecurity

U. S. Social Security Crisis can be put U. S. Social Security Crisis can be put off almost forever through open off almost forever through open immigrationimmigration

This is not black vs. This is not black vs. white. It reflects white. It reflects different valuesdifferent values U. S. Low-density metro areas U. S. Low-density metro areas

dependent on auto, high dependent on auto, high unmeasured cost of traffic unmeasured cost of traffic congestion, subsidies to auto congestion, subsidies to auto transit, starvation of public transittransit, starvation of public transit

Europe high-density metro areas, Europe high-density metro areas, unmeasured time cost of public unmeasured time cost of public transit, subsidies to public transittransit, subsidies to public transit

A Solid Reason why the A Solid Reason why the U. S.U. S.

Welfare Level is Truly Welfare Level is Truly HigherHigher Hedonic regressions show: people Hedonic regressions show: people

value square feet of housing and value square feet of housing and exterior landexterior land

The average American housing unit is The average American housing unit is more than double the average more than double the average European unitEuropean unit

The land area is at least 4x, maybe The land area is at least 4x, maybe moremore

The time cost of commuting may be The time cost of commuting may be less when all the delays of public less when all the delays of public transit are taken into accounttransit are taken into account

Summarizing Welfare Summarizing Welfare ComparisonComparison

Started with Europe/ US RatiosStarted with Europe/ US RatiosQ/N 77Q/N 77 Q/A 93Q/A 93

One-third of A/N is voluntaryOne-third of A/N is voluntary

Q/N 82Q/N 82 Q/A 93Q/A 93 One-half of remaining YPC One-half of remaining YPC

difference disappears because U. difference disappears because U. S. GDP is overstatedS. GDP is overstated

Q/N 91Q/N 91 Q/A 102Q/A 102

The New Productivity The New Productivity Divergence Divergence

Focus on 1995-2003Focus on 1995-2003 Growth rates of GDP per Hour Growth rates of GDP per Hour

WorkedWorked– U. S. 2.33U. S. 2.33– Europe 1.15Europe 1.15– Difference 1.18Difference 1.18

Over eight years, causes Europe/US Over eight years, causes Europe/US to fall back from 94 to 85 percentto fall back from 94 to 85 percent

The U. S. Productivity The U. S. Productivity Growth “Explosion”Growth “Explosion”

LP Actual vs Trend

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003

133 Years: Falling Behind, Catching Up, Now Falling Behind

Annual Growth Rate of GDP per Hour, EU minus US, 1870-2003

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

1870-1913 1913-1950 1950-1973 1973-1995 1995-2003

The Reversal Shown in Levels

GDP per Hour, EU as a percent of US, 1870-2003

0

20

40

60

80

100

120

1870 1890 1910 1930 1950 1970 1990

Basic Paradox about ITBasic Paradox about IT

Both Europe and U. S. Rapidly Both Europe and U. S. Rapidly Adopted New Economy TechnologyAdopted New Economy Technology– Personal ComputersPersonal Computers– Web AccessWeb Access– Mobile PhonesMobile Phones

But Europe hasn’t taken offBut Europe hasn’t taken off Conclusion: Role of IT in U. S. revival Conclusion: Role of IT in U. S. revival

must have been exaggeratedmust have been exaggerated

Output per Hour by Industry Group, EU and US, 1990-2003

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1990-1995 1995-2001

US ICT Pro

EU ICT Pro

US ICT Using

EU ICT Using

US Non-ICT

EU Non-ICT

Finding the Culprit Industries

Where is the Difference? Where is the Difference?

The Van-Ark The Van-Ark DecomposionDecomposion 55% retail trade55% retail trade 24% wholesale trade24% wholesale trade 20% securities20% securities Rest of the economy: ZERORest of the economy: ZERO U. S. negative in telecom, U. S. negative in telecom,

backwardness of mobile phonesbackwardness of mobile phones

U. S. Retail MiracleU. S. Retail Miracle

Not uniform, concentrated in Not uniform, concentrated in “large stores charging low prices “large stores charging low prices with self-service format”with self-service format”

ALLALL of productivity gains post- of productivity gains post-1990 attributable to 1990 attributable to NEWNEW establishments and closing of old establishments and closing of old establishmentsestablishments

Average pre-1990 establishment Average pre-1990 establishment had had zero zero productivity growthproductivity growth

Europe in RetailingEurope in Retailing

Not uniform – Carrefour, IkeaNot uniform – Carrefour, Ikea U. S. “Big Boxes” (Wal-Mart, Home Depot, U. S. “Big Boxes” (Wal-Mart, Home Depot,

Best Buy, Target)Best Buy, Target) Europe: Europe:

– Land-use regulation, planning approvalLand-use regulation, planning approval– Shop-closing restrictions on hoursShop-closing restrictions on hours– Central-city congestion, protection of central-Central-city congestion, protection of central-

city shopping precinctscity shopping precincts– Prohibition on discounting by large new storesProhibition on discounting by large new stores– Related to Phelps’ corporatismRelated to Phelps’ corporatism

Not enough emphasis on Not enough emphasis on new vs. oldnew vs. old

It’s not just that land-use planning It’s not just that land-use planning prevents Wal-mart from setting prevents Wal-mart from setting up a new big box on every up a new big box on every highway interchange in Europehighway interchange in Europe

It’s that the MIX of retailing in It’s that the MIX of retailing in Europe is heavily composed of Europe is heavily composed of small, old-fashioned firmssmall, old-fashioned firms

Let’s Walk down a street Let’s Walk down a street in Paris on the Left Bankin Paris on the Left Bank

Every few blocks, a green cross Every few blocks, a green cross indicating a pharmacyindicating a pharmacy

To American eyes, these are antique To American eyes, these are antique anachronismsanachronisms– One-by-one service at the counter, no One-by-one service at the counter, no

check out stationscheck out stations– Tiny, small, don’t carry any of the obvious Tiny, small, don’t carry any of the obvious

things that a pharmacy should carry. things that a pharmacy should carry. Compare to the ubiquitous Walgreens.Compare to the ubiquitous Walgreens.

Incentives for Incentives for InnovationInnovation

in the U. S. and Europein the U. S. and Europe Discontinuities in technical changeDiscontinuities in technical change Japanese success in 1980s didn’t Japanese success in 1980s didn’t

lead to Japanese success in 1990slead to Japanese success in 1990s– Carriage makers didn’t dominate autosCarriage makers didn’t dominate autos– Steam-engine locomotive builders Steam-engine locomotive builders

didn’t dominate dieselsdidn’t dominate diesels– Japanese auto prowess didn’t translate Japanese auto prowess didn’t translate

to chips or softwareto chips or software

Traditional Sources of Traditional Sources of U. S. AdvantageU. S. Advantage

Labor scarcity, land abundanceLabor scarcity, land abundance– Early leadership in ag machineryEarly leadership in ag machinery– Petroleum resources led to early lead in Petroleum resources led to early lead in

petrochemicalspetrochemicals– BUT: Japan, NL have few natural resourcesBUT: Japan, NL have few natural resources

Early lead in autos and motor transportEarly lead in autos and motor transport– Mass productionMass production– Long distances, cheap landLong distances, cheap land– 80% of world production in 1929, led to 80% of world production in 1929, led to

“arsenal of democracy”“arsenal of democracy”

Education and Education and University ResearchUniversity Research

U. S. leadership in secondary education, U. S. leadership in secondary education, 1910-401910-40

U. S. leadership in college education, post U. S. leadership in college education, post WWIIWWII

U. S. research universities America’s U. S. research universities America’s leading export industry even in dismal leading export industry even in dismal 1972-951972-95– U. S. peer reviewed grants to young U. S. peer reviewed grants to young

professors, not young studentsprofessors, not young students– Contrast with Europe tuition subsidiesContrast with Europe tuition subsidies

Government-FundedGovernment-FundedResearchResearch

Subsidies go back to land grants Subsidies go back to land grants for RR, homestead act, for RR, homestead act, agricultural research stationsagricultural research stations

Role of NIH, NSFRole of NIH, NSF U. S. mix of private and state-U. S. mix of private and state-

funded universitiesfunded universities Europe: General budgetary Europe: General budgetary

support without incentivessupport without incentives

Strong Patent Strong Patent ProtectionProtection Other countries differOther countries differ In pharmaceuticals, some foreign In pharmaceuticals, some foreign

research labs moving to U. S.research labs moving to U. S. Controversy about U. S. citizens Controversy about U. S. citizens

funding drug research for the funding drug research for the worldworld

Language and Language and ImmigrationImmigration

Spread of English worldwideSpread of English worldwide One source of U. S. dominance of One source of U. S. dominance of

software industrysoftware industry Immigration: role of India, East Immigration: role of India, East

Asia in supplying Silicon Valley Asia in supplying Silicon Valley entrepreneursentrepreneurs

Foreign students at U. S. graduate Foreign students at U. S. graduate schoolsschools

Intro to Thinking about Intro to Thinking about Canada – I’ve Got Canada – I’ve Got

Questions, Few AnswersQuestions, Few Answers In the spectrum between U. S. and In the spectrum between U. S. and

Europe, UK and Canada are somewhere Europe, UK and Canada are somewhere betweenbetween

Canada has all the historical U. S. Canada has all the historical U. S. advantagesadvantages– Land/labor ratioLand/labor ratio– No wartime destructionNo wartime destruction– Lacking only economies of scaleLacking only economies of scale

Auto production 1929?Auto production 1929? Why Shouldn’t Canada grow faster as Why Shouldn’t Canada grow faster as

free trade (NAFTA) reduces its scale free trade (NAFTA) reduces its scale disadvantage?disadvantage?

U. S. vs. Canada, 1989-2003

Growth in Output per Hour, Business Sector, U. S. and Canada, 1989-2003

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1989-96 1996-2000 2000-03 1996-2003 96-03 vs. 89-96

Perc

en

t p

er

An

nu

m

United States

Canada

U. S. - Canada

Canada vs. U. S., the big difference

2000-2003 is hours, not output!Annual Rate of Change of Output, Hours, and Output per Hour,

U. S. vs. Europe, 1990-2003

1996-20031989-96 1996-2000 2000-03 1996-2003vs. 1989-96

United States Output 2.9 4.7 2.0 3.5 0.7 Hours 1.1 2.1 -1.7 0.5 -0.7 Output per Hour 1.7 2.6 3.7 3.0 1.3

Canada Output 1.5 5.9 2.1 4.2 2.7 Hours 1.3 3.1 1.1 2.2 1.9 Output per Hour 1.2 2.8 1.0 2.0 0.8

Speculating About U. Speculating About U. S. vs. CanadaS. vs. Canada

Canada did better than the U. S. Canada did better than the U. S. in the late 1990sin the late 1990s

Canada’s output grew as fast in Canada’s output grew as fast in 2000-032000-03

What’s going on? Why would What’s going on? Why would hours grow in 2000-03 in Canada hours grow in 2000-03 in Canada but shrink in U. S.?but shrink in U. S.?

Unique Events in U. S. Unique Events in U. S. since 2000since 2000

Intangible Capital?Intangible Capital?– The argument is that there was a lot of The argument is that there was a lot of

unmeasured investment in late 1990s, unmeasured investment in late 1990s, productivity growth understated 1995-00 productivity growth understated 1995-00 and overstated 00-03.and overstated 00-03.

– Why not in Canada? Imports vs. Exports of Why not in Canada? Imports vs. Exports of IT?IT?

– But intangible investment is occurring for But intangible investment is occurring for users of IT, not producers, so Canada is users of IT, not producers, so Canada is the samethe same

The U. S. Profit The U. S. Profit Squeeze – the Big Squeeze – the Big

Difference?Difference? Compared to 1990-91, when there was Compared to 1990-91, when there was

no drop in U. S. profitsno drop in U. S. profits– In 2000-02, U. S. profits collapsedIn 2000-02, U. S. profits collapsed– Accounting scandals made a substantial Accounting scandals made a substantial

share of 1998-2000 profits “phony”share of 1998-2000 profits “phony” Unprecedented pressure for cost-Unprecedented pressure for cost-

cutting in U. S.cutting in U. S. Can profit difference in Canada vs. U. Can profit difference in Canada vs. U.

S. provide the missing explanation?S. provide the missing explanation?

Role of Immigration in Role of Immigration in Canada vs. U. S. Canada vs. U. S.

Shouldn’t Immigration boost Shouldn’t Immigration boost productivity in Canada more than productivity in Canada more than U. S.U. S.

Rio Grande vs. Vancouver airportRio Grande vs. Vancouver airport Cash up front for talented Asians?Cash up front for talented Asians? Hands up – who mows your lawn?Hands up – who mows your lawn? YOW airport – a mini BeirutYOW airport – a mini Beirut

Invitation to the Invitation to the AudienceAudience

Who knows about joint operations Who knows about joint operations in Canada and U. S. since 2000?in Canada and U. S. since 2000?– U. S. owned, Canada-owned?U. S. owned, Canada-owned?– What is the difference that created a What is the difference that created a

decline in employment in U. S.?decline in employment in U. S.? Is there any role for measurement Is there any role for measurement

errors in employment?errors in employment?