Thursday, January 19, 2006

The Productivity Gap Between Europe and the United States

A nation's GDP is determined by its labor force, its capital stock, and its technological knowledge. An increase in the amount of capital per worker increases a nation's GDP. An improvement in technology allows a nation to get more GDP out of its existing capital stock. Technology refers to the way an economy organizes its labor and capital to produce goods and services. If two nations have the same number of workers and capital but one nation uses better technology to get more out of its labor and capital, it will generate more GDP. The nation with better technology has higher productivity--it gets more output per hour of labor input.

A recent Hal Varian commentary in the New York Times focused on the role of technological knowledge in explaining the different productivity experiences of Europe and the United States. Compared to Europe, the United States experienced much stronger growth in output per labor hour over the past decade. Why? The evidence suggests that American firms integrate information technology more quickly than their European counterparts. Follow the link to find out more:


1. What happened to the rate of productivity growth in the United States over the past three decades? What industries have been fueling productivity growth in the United States?

2. A computer, like an electric motor, is simply capital--a physical resource. Technology refers to the way that we organize our resources to produce goods and services. An improvement in technology occurs when we have a bright idea that allows us to produce more of the things we want from the same (or fewer) resources.

What technological improvement created a productivity boom by putting the electric motor to a novel use?

3. Given that American and European firms have access to the same information technology capital, why are American firms more productive?

4. What are the differences between British firms and American firms located in Britain when it comes to information technology capital per worker?

5. Consider two made-up firms: Initech and Initrode. Initech emphasizes experience- based promotions, a system that benefits older workers who have worked there for a long time. Initrode emphasizes merit-based pay, a system that allows the brightest young workers to move up quickly. In which firm would you expect managerial comfort with information technology to be highest?

Topics: Productivity, Technology



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