Thorvaldur Gylfason

Comparison of Europe’s economic performance with that of the United States

Three suggestionso Output per hour worked – that is, labor

productivity – is a better measure of economic performance than output per person

o Output, like assets, might be better viewed in two dimensions: average level of output, or income, and its distribution across the population

o Anthropometric studies might help quantify the missing dimension

Leaves out◦ Domestic production (child rearing)◦ Black economy (drugs trade)◦ Changes in macroeconomic stocks

Environmental pollution (green national accounting) Accumulation of external debt Exchange rate problem has been solved by ppp adjustments

Does not accord well with measures of happiness Does not take into account the effort behind the

output, especially work GDP per hour says more than GDP per capita

◦ Reflects efficiencyefficiency, that is, labor productivity◦ Sustainable GDP divided by an index of input use would be

a still better measure of economic performance

Inefficiency (high food prices, etc.) necessitates more work and results in less output per capita than otherwise, as in Japan

Europe loves leisureleisure (Blanchard) European labor unions labor unions reduce work (Alesina) Europe’s heavy tax burden tax burden reduces willingness

to work (Prescott) European valuesvalues – economic culture! – is

different than in the US (Phelps) Conclusion: Perhaps Europeans want to work

less than Americans◦ But voluntary reduction in work need not be a sign of

weakness, on the contrary◦ Double benefit of growth and increased welfare:

Higher income, less work

25-50 year old wage earners◦ Same labor force participation in Europe and US◦ Suggests similar propensity to work, similar values

Wage earners in their 60s◦ Three out of four European wage earners have quit

work◦ Half of US wage earners continues to work

Workers in their 70s◦ Nine out of ten European wage earners have quit work◦ A fourth of US wage earners continues to work

Perhaps Europeans can afford to retire earlier than Americans?◦ Europe: More social security, more equality, more time◦ US: Higher income per capita

Americans work more than all other high-income nations except the Greeks

How to explain preceding chart1. Increased labor productivity enables people to

work less More efficiency permits more leisure Backward-bending labor supply schedule

2. Too much work tends to reduce efficiency Tired hands make mistakes

3. What we see is simply a downward-sloping labor demand curve

Increased labor productivity and thereby higher wages reduce demand for labor

Probably all three explanations apply

Despite world’s second highest GDP per capita, US workers need to work hard: Why?◦ Stronger work ethic in US◦ Lower taxes encourage work◦ Less public consumption calls for more private

consumption and hence more work◦ Weaker labor unions price fewer workers out of jobs

One further hypothesis◦ Large inequalities in US reduce efficiency

Does not show in GDP per capita, but is visible in GDP per hour because social security permits less work

◦ So, assess economic performance in two dimensions Return and risk (income level and inequality)

View national economy like an asset Assets carry returns and entail risks Return is directly related to risk

◦ Few prefer no riskFew prefer no risk, because then the associated return becomes too small

◦ Few seek maximum returnFew seek maximum return, because then the associated risk becomes too large

◦ Most stake out an intermediate position, Most stake out an intermediate position, balancing the desire for a high return against the desire to keep risk low

Does this idea apply to the national economy?

AnarchyAnarchy: Income distribution is fair, if all have same opportunities and free markets produce inequality without government intervention

InterventionIntervention: Income distribution is fair, if all have same opportunities and government secures that ...◦ RawlsRawls: The poor have the highest possible incomes◦ Rawls in reverseRawls in reverse: The rich have the highest

possible incomes (you know who I mean)◦ Middle roadMiddle road: The middle class has the highest

possible incomes◦ Another middle roadAnother middle road: Average income is at a

maximum without excessive inequality

Equality

South-AfricaSouth-Africa

SwedenSweden

FranceFrance

Equality and EfficiencyEquality and EfficiencyE

ffici

en

cy (

inco

me p

er

cap

ita)

Increased equality reduces efficiency

Increased equality increases efficiency

Utopia?Utopia?

Where is the optimum?

Equality

SwedenSweden

Effi

cien

cy (

inco

me p

er

hou

r w

ork

ed

) Increased equality reduces efficiency

Increased equality increases efficiency

FranceFrance

US

Equality and EfficiencyEquality and Efficiency

South-AfricaSouth-Africa

1 2 3 4 5 6 7 8 9 10

A 10 5 5 3 2 2 1 1 1 0B 10 5 5 4 4 2 2 1 1 0C 10 7 5 5 5 2 2 1 1 0D 10 7 5 6 6 2 3 2 1 0E 10 9 5 8 7 2 4 2 1 0F 10 9 15 9 8 10 4 3 1 0G 10 13 15 11 12 10 4 3 2 0H 10 14 15 16 15 20 10 7 2 0I 10 15 15 18 16 20 30 20 15 0J 10 16 15 20 25 30 40 60 75 100Mean 10 10 10 10 10 10 10 10 10 10Standard dev. 0 4.2 5.3 6.1 7.0 10.1 13.6 18.5 23.2 31.6Gini 0 25 28 36 40 56 66 78 86 10020/20 1 3.1 3 5.4 6.8 12.5 23.3 40.0 45.0

Gini index mirrors the standard deviation of the income distribution

Gini index is closely related to the 20/20 ratio

USTurkey

PortugalEstonia

New ZealandUK

ItalyIrelandIcelandGreece

AustraliaPolandLatviaSpain

SwitzerlandCanadaFrance

LithuaniaSouth KoreaNetherlandsLuxembourg

AustriaSlovenia

GermanyHungaryFinland

SlovakiaNorway

Czech RepublicSwedenBelgium

JapanDenmark

Americans do not live as long as Europeans◦ 1960: Ten months shorter lives in US◦ 2003: Fifteen months shorter lives in US

White Americans used to be taller than Germans, now Americans are shorter◦ 1960: Americans were 2-3 cm taller◦ 2000: Americans are 2-3 cm shorter shorter

Human stature depends mostly on social conditions in youth, and is final◦ Reflects past economic conditions◦ Nutrition, environment, health, housing, stress

Is America lagging behind Europe?

West-Germans, 20-70 years old, men and women, are on average 1 cm taller than East-Germans

US high-income earners, of both genders and of all ages, are on average 1-2 cm taller than US low-income earners

College-educated Americans, of both genders and of all ages, are on average 3-4 cm taller than those Americans who have acquired no education beyond primary school

Europe seems to be catching up with the US Seven European countries already produce

more output per hour than the US Europeans have grown taller than

Americans since1960◦ In US, a poor underclass reduces average stature

and labor productivity, not in Europe◦ This shows in GDP per hour, but not in GDP per

capita, as Americans compensate by working hard Europeans work less than Americans

◦ Europe can afford to work less due to higher and more equally distributed living standards

◦ Or can it? That is the question