United States vs. Europe — Who's More Productive?

by George W. Zobrist

Productivity can be defined as the output of any production process, per unit of input. Increasing productivity means producing more with less. There are numerous measures of productivity (see Table 1), but when making international comparisons of productivity, labor productivity is one of the most commonly used indicators.

In the early 1990s, optimism was growing that the burgeoning European Union (EU) would become a driver of productivity growth around the globe. Those hopes were tied to the relaxation of trade barriers and close integration of the various EU markets. Today, however, the outlook is less optimistic. Instead of sustained growth, the 1990s witnessed a slowing of the EU's economic growth, and by mid-decade the EU was running behind the United States.

On a broad scale, pre-1970s France and Germany had more hours worked per capita than the United States, but from 1970 to 2002, the United States increased its hours worked per capita by 20 percent, while there was a decrease of roughly 20 percent in France, and similar decreases in most other European countries.

U.S. labor productivity increased significantly between 1995 and 2000 — a period of growth largely attributable to the “tech bubble,” which was not as pronounced in Europe. From 1990 to 2000, U.S. industries that utilized information and computer technology enjoyed considerably higher labor productivity than EU countries (see Issues in Productivity Performance, U.S. vs. Europe, Technical Panel on Assumptions and Methods, Social Security Advisory Board, Washington, D.C., 11 April 2003).

Table 1. Overview of most frequently used productivity measures

Different Values, Different Levels of Productivity?

We've all heard that Europeans work less hours and take longer "holidays" than we do, but does that mean that they're less productive? As Swedish think-tank Timbro’s June 2004 report, EU Versus USA, stated, “Europeans work at their leisure, while Americans work at their job.” The report's authors, Fredrik Bergström and Robert Gidehag, say that, traditionally, the EU’s political agenda doesn’t put as high a premium on economic growth as the United States does; and that Europeans also face higher taxes, equalization policies and a larger public sector, which also factor into productivity levels and productivity growth.

Edward Prescott's October 2004 article, "Why Do Americans Work More Than Europeans?" in the Wall Street Journal offers an interesting economic viewpoint on the productivity disparity between the EU and the United States. Prescott suggests that tax rate fluctuations affect labor supply, which, in turn, affects productivity. As an example, Prescott points to the fact that in 1998 Spain flattened its tax rate in a similar fashion to the U.S. rate cuts of 1986, and the result was a 12 percent increase in the labor supply.

The Organization for Economic Cooperation and Development, an intergovernmental organization of some 30 industrialized nations, has reported that Americans aged 15 to 64, on a per-person basis, work up to 50 percent more than their European counterparts. According to Prescott, though, Europeans don't really work less than Americans, and, given the same incentives, all people make similar choices between labor and leisure. The "disparity," he argues, can be explained by the marginal tax rate in the EU countries, not cultural or institutional factors. Some EU countries (notably Italy), he says, have large “underground” economies — which are largely untaxed. If included in total hours worked, Prescott surmises, Europeans would be nearly level with Americans.

On the flip side, in a 29 July 2004 article in the International Herald Tribute, Katrin Bennold theorizes that Europeans are more interested in enjoying life and are not as materially oriented as Americans, that Europeans trade leisure time and security for less material goods. Like Bergström and Gidehag, Bennold points out that Europeans traditionally opt to work fewer hours and take longer vacations. Additionally, she notes, Eurpoean governments have put in place various versions of national health care, education and retirement benefits, minimum income provisions, and disability. Such social welfare programs, designed to limit the risk of destitution, suggest that Europeans are also willing to accept lower productivity output for greater security through social welfare.

Outsourcing, Offshoring and U.S. Productivity

Another variable that should be considered in the domestic productivity equation is the effect of outsourcing and offshoring on productivity measures. In a March 2004 report, the Bureau of Labor Statistics states that the combination of domestic outsourcing and offshoring contributed about 1.5 percent per year to output per hour growth through 1995 and only about 1 percent per year after that. The outsourcing and offshoring trends do not appear to have played a significant role in the United States productivity speed-up between 1995 and 2000.

The long-term effect of offshoring and outsourcing on the economy and U.S. high-tech professionals remains to be seen. However, offshoring was the second-highest cause of unemployment among U.S. technical professionals, according to the 2004 IEEE-USA Unemployment Survey [read the related IEEE-USA news release].

For more information

• The U.S. Department of Labor's Bureau of Labor Statistics [www.bls.gov] — for numerous statistics both domestic/international

• IEEE-USA [www.ieeeusa.org] — for outsourcing/offshoring positions

• EconLog [www.econlog.econlib.org/archives] — edited by A. Kling

• The Organization for Economic Cooperation and Development (OECD) [www.oecd.org] — for numerous resources providing an international perspective (e.g., OECD Manual: Measuring Productivity]

• EU Versus USA, Bergström and Gidehag, Timbro, Stockholm, Sweden (June 2004) [www.timbro.com/euvsusa/pdf/EU_vs_USA_English.pdf]

• The Conference Board [www.conference-board.org]

• Prescott, Edward C.,"Why Do Americans Work More Than Europeans?" The Wall Street Journal Online, 21 October 2004

• A wealth of information can be found through Google, using keywords, such as: U.S. vs. Europe/Asia productivity; and sites for the Wall Street Journal, International Herald Tribune, USA Today, The New York Times, etc. Also, searching through various University research papers and researcher WEB logs (BLOGS)

Dr. George W. Zobrist is professor emeritus at the University of Missouri-Rolla, Department of Computer Science, and IEEE-USA's Member Activities editor. Comments may be submitted to todaysengineer@ieee.org. Opinions expressed are the author's.