How Can Europe Compete?
Gavin Cameron
University of Oxford
OUBEP Topical Economics 2006
the Lisbon Agenda
• UK and European policymaking with respect to economic growth is bound
up with the EU’s Lisbon Agenda: Plan to make the EU ‘the most dynamic
and competitive knowledge-based economy in the world’ , by 2010.
• This talk outlines
– Europe’s relative performance: GDP per capita, productivity, and labour
utilisation;
– The Lisbon Agenda: Microeconomic Reforms and Employment
Guidelines;
– The simple economics of growth and jobs.
– Some suggested structural reforms.
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living standards
• Economists use a number of different measurements of national income
and productivity -the simplest is GDP per capita.
• More formally, though, GDP per capita is a function of productivity per
hour and labour utilisation:
GDP
Pop
=
GDP
Hour
*
Hours
Pop
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Source: Robert J Gordon (2005)
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Source: O’Mahony and Van Ark (2003), figure 1.1.
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the sources of productivity growth
• Growth of labour productivity =
weighted growth of capital per worker hour
+ growth of total factor productivity
• Growth of total factor productivity
– Higher quality products
– New varieties of products
– Better ways to use existing inputs

GDP
Hour
=

Capital
*

Total Factor Productivity
Hour
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growth accounting
Output per worker (K/L)
C
Output per worker, Y’/L
B
Output per worker, Y/L
A
A rise in technology raises the
steady-state level of output per
capita. Part of this rise (AB) is the
pure effect of technical change
(TFP), the other part (BC) is due
to ensuing capital accumulation.
Capital per worker (K/L)
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Source: O’Mahony and Van Ark (2003), table 1.4b.
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Source: O’Mahony and Van Ark (2003), figure III.5
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Source: O’Mahony and Van Ark (2003), table III.14.
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Source: O’Mahony and Van Ark (2003), table III.5.
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Source: O’Mahony and Van Ark (2003), table II.7
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labour utilisation
• Labour utilisation is captured by two broad elements.
– Labour intensity is the number of hours worked per worker.
– Employment rate is the proportion of the population that is in work.
• Government policies can affect both of these, for example, by setting
maximum working hours or by making hiring & firing more costly.
Hours
Population
=
Hours
Worker
*
Workers
Active
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Active
Population
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equilibrium employment
real wage
labour supply, Ls
wage-setting, WS
active
workforce
labour demand, Ld
price-setting: firms set a
constant mark-up of
prices over costs, PS
involuntary
voluntary
NAIRU
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how to raise employment
• Need to target three groups: voluntary unemployed, involuntary
unemployed, and the inactive:
– Reform of the benefit system, especially duration;
– Limitations on union power: no closed shops, no secondary picketing,
secret ballots;
– Changes to wage bargaining, especially increased employer-union
coordination;
– Tax reform (lower payroll taxes, minimum wages for the unskilled etc);
– Flexicurity: Cuts to employment protection, coupled with active labour
market policies;
– Active Labour Market Policies: training and work experience schemes
for long-term unemployed, unskilled, youths, women, older workers;
– Increased labour mobility.
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how not to raise employment
• Cunning demand-side policies (unlikely to have much effect in the longrun, plus very expensive);
• Job-sharing or cuts in working hours;
• Increased investment by firms (although this will raise wages);
• Protectionism (any benefit to workers massively outweighed by costs to
consumers).
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unemployment around the world
Source: Faggio and Nickell (2006)
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Source: BIS (2006)
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Lisbon Agenda reforms
• Microeconomic Reforms:
– The Lisbon Agenda argues that the ‘knowledge economy’ is vital to the
future of Europe.
– It proposes that the EU should aim to spend 3 per cent of GDP on R&D.
– But EU problems not just in the high-technology sector.
• Employment Guidelines:
– Attract and retain employment through modernising social protection;
– Improve adaptability of workers and firms and hence flexibility of
labour market;
– Increase investment in human capital (education and skills).
– But strong opposition in many countries to cuts in benefits and
employment protection.
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growth and jobs
• Labour Utilisation
– In the short to medium-run, aggregate employment in an economy is
largely a function of macroeconomic policy. Evidence suggests that
strong, balanced, growth tends to raise employment a little, but sectoral
reallocation of labour may reduce employment a little.
– In the long-run, aggregate employment is mainly affected by the
workings of the labour market.
• Productivity
– In the short to medium-run, rising employment may exert downward
pressure on productivity and wages, especially if the newly employed
are young, unskilled, female, old or are long-term unemployed (and
hence have lower productivity than existing workers).
– In the long-run, increased capital accumulation will tend to offset this
effect and there is little evidence of an effect of employment rates on
growth. However, some factors that make employment outcomes
worse (such as bad labour relations) may also be bad for growth.
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Source: O’Mahony and Van Ark (2003), table I.1.
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Source: OECD (2005)
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Source: OECD (2005)
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summary
• Recent European economic performance has been weak:
– This is particularly the case for labour utilisation.
– But also increasingly true for productivity growth.
– Weakness especially in agriculture, manufacturing, distribution and
financial services.
– Strong in utilities, construction, communications.
• Lisbon agenda unlikely to help soon:
– Too focussed on high-tech; too little on low tech and job creation.
– European workers, especially the long-term unemployed unskilled,
women, youths and older workers need pathways to work.
– Question marks over willingness of governments to implement agenda,
and over ability of ECB and finance ministries to co-ordinate
macroeconomic policy.
• But Europe is very diverse, so difficult to generalise!
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