Europe’s Productivity Challenge
In this month’s McKinsey Quarterly, Heino Fassbender opines on Europe’s productivity issues relative to the United States. The article is based on research for his upcoming book, Europe as an Economic Powerhouse: How the Old Continent Is Gaining New Strength.
Fassbender’s data shows that the gap between US and European productivity appears to be broadening, and not simply due to “Europe’s welfare state supposedly being the main culprit.” Instead, measures point to a per capita output gap of 32% relative to the United States. The data shows that:
Europe’s crisis is not only that it produces one-third less than the United States per capita but also that the gap between the two is not becoming notably smaller. There are three key explanations for the gap (exhibit). The most important is low labor productivity (16 percent less than that of the United States in 2004). The other two involve low labor inputs, which were 19 percent below US levels in the pre-enlargement European Union of 2004. In short, Europeans work fewer hours than their North American counterparts do. Many people exaggerate the role of the welfare state in Europe’s economic problems; in reality it accounts for little more than a third of the labor input gap. Overwhelmingly, Europeans have opted for more leisure.
So Europeans have opted for more leisure….in fact, his data quantifies the comparison of hours worked exactly - an average of 1,564 hours per year (European) versus 1,819 hours per year (the US). Assuming eight hour work days, that equates to nearly 32 days a year less. One could account for 20 or so of these days during the “August holiday” alone.
And what should Europe do to close the gap? Fassbender recommends four items:
1) Complete the single European market to build strength;
2) Regulate business more intelligently to control for productivity-impacting policy;
3) Create higher-value goods and services; and
4) Move state spending squarely toward research and education.
The bell for European change has effectively been rung with this and other publications. The question is, can the ringing be heard while vacationing?
Let’s keep the conversation going.