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A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Alesina, Alberto Article Europe NBER Reporter Online Provided in Cooperation with: National Bureau of Economic Research (NBER), Cambridge, Mass. Suggested Citation: Alesina, Alberto (2006) : Europe, NBER Reporter Online, National Bureau of Economic Research (NBER), Cambridge, MA, Iss. Summer 2006, pp. 8-10 This Version is available at: http://hdl.handle.net/10419/61887 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Europe was slower to cap- Western Europe (in short, Europe) was There are three reasons why work ture the benefits of the technological rev- catching up with the United States from hours per person are lower in Europe: ) olution in information technology (IT). the end of the Second World War until fewer people are in the labor force (early Part of the reason was lack of competition the mid-980s; from 950 to about 975, retirements, lower worker participation, in the product and, especially, the ser- we speak of a European miracle. Then, delayed entry into the labor force, all in vice markets. The slow pace of deregula- something changed. The United States various combinations depending on the tion in these sectors created disincentives re-emerged from the difficult decades of country); 2) more vacation time for those to innovation and investment. An early the 970s with a renewed political energy who do work; 3) lower hours in a “nor- deregulation in the980s, restructuring that led to deregulation, increased compe- mal” work week. In different propor- of companies, and a new generation of tition, reduction of marginal tax rates, and tions for different countries, all three fac- aggressive and powerful CEOs in the restructuring of corporations, which later tors matter. For instance, in Italy the first United States created the fertile ground facilitated the immediate adoption of the factor, lower participation, is the driving on which the IT revolution could gener- innovations from the information revo- force. In France and Germany, all three ate an exceptional period of rapid growth. lution. Europe, instead, seemed “stuck:” factors explain about a third each of the In Europe, instead, incumbent firms con- incapable of gathering sufficient energy difference with the United States. tinued with the old practice of govern- to reform itself. This was especially the Europeans are working less and less ment protection from competition and case for the largest countries: Germany, for three reasons: first, increasing mar- government hidden subsidies. France, Italy, and Spain. ginal tax rates (especially from the 960s The second major rigidity in Europe to the 980s); second, a preference for is, of course, in the labor market. Firing What Happened? leisure; and, third, labor regulation and costs interfere with firms’ decisions, mak- union-imposed standards for work time, ing them cautious about hiring. Rather Let’s start with the basics. One of the including retirement regulations. Social than removing these impediments (and most remarkable facts about Europeans is multipliers compounds these effects: introducing well thought out unemploy- that they work much less than Americans. if a family member or friend has more ment insurance schemes), several coun- Europeans worked more than Americans time off, your own benefit from leisure tries, especially France, seem unable to in the 950s and 960s, when they were increases, creating more social demand reform. Europeans remain enamored of lowering their heads in the war recon- for leisure. When it becomes the social “job security” which often means “secu- struction efforts, first, and then during norm, because of regulations requiring six rity” for those insiders who have a job a period of boom. But then Europeans weeks of vacation, or retirement at age 60 and no work for those who are not “in”. began to work fewer and fewer hours per because the law imposes it, then it is diffi- Progress in this direction, achieved in capita. While in the early 970s hours cult to change people’s minds about what Denmark and Sweden, both of which worked per person were about the same is “fair”. have vastly reduced firing costs, has been in Europe and in the United States, today Working less and maintaining reason- immediately followed by a significant the French, German, and Italians work able growth rates is possible if your produc- reduction in unemployment. about 400 hours per person per year ver- tivity increases at a healthy pace. In fact, In summary, you can work less and sus about 800 hours per person in the this has been the case for several decades less and not fall behind if you are more in Europe in the 950s, 960s, and later and more productive when you work. * Alesina is a Research Associate in the through the 980s. So, Europeans man- But several countries in Europe may have NBER’s Programs on Public Economics, aged to keep up with the United States pushed this too far, and their policies Monetary Economics, Political Economy, and Economic Fluctuations and Growth. by working less but being more and more are not sufficiently productivity enhanc- He is also a professor of economics at productive. But in the 990s, European ing. Perhaps Europeans have more or less Harvard University. productivity growth fell below that of the consciously “chosen” to grow less than 8 NBER Reporter Summer 2006 the United States and to fall behind eco- to “plan,” and a favorable view of gov- more “political argument” was put for- nomically and, as a consequence, politi- ernment dictated policies for achieving a ward in favor of the Euro: the common cally, but this does not seem to be the offi- multitude of social goals. The second is currency, by shutting down competitive cial rhetoric emanating from European the resistance of national governments to devaluations as a temporary “drug” for a capitals. truly open their markets, a resistance that national economy, would have facilitated has created obstacles to those European the adoption of structural reforms in the The Role of the EU leaders who indeed understood the ben- labor, goods, and service markets. Thus efits of competition. In European capitals, far it has not quite worked, certainly not Has the European Union been able often one hears a grand pro-European everywhere and with the necessary speed. to increase competition and move the rhetoric, but as soon as non-domestic (but Labor and goods market reforms, with continent to market-friendly growth- European) firms try to acquire domestic the exception of a few northern coun- enhancing reforms? The record is mixed. ones, the European rhetoric is immedi- tries, have been very slow to materialize On the one hand, some progress has been ately forgotten and nationalistic protec- and encounter great political opposition achieved in the area of trade, government tion resurfaces. of two types. One is that of “insiders” subsidies, and goods markets. But, on who fear losing their privileges. Think the other hand, Europe remains full of And the Euro? of incumbent protected firms, unionized impediments to free market competition workers with job security, service provid- across national boundaries, especially in Overall, the first six years of the Euro ers sheltered by international competi- the service sectors and when it comes to have confirmed the pros and cons that tion, banks protected by foreign acquisi- mergers and acquisition. 2 economists had identified regarding the tions, and so on. The second stems from Rather than concentrating on this construction of an average monetary the general European public, which by critical point of a common and truly con- union.5 The Euro has eliminated the pos- and large is “ideologically” averse to free tinental free market, EU institutions have sibility of competitive devaluations that, market thinking. In fact, Europe, espe- vested much energy in areas that are better in the end, cause inflation and has vastly cially France, seems to be embracing more left to national governments. An excessive reduced the risk premise of government and more protectionist policies when it tendency to “coordinate” and “plan” in debt of highly indebted countries, such comes to foreign competition; and the Brussels has led to inconclusive rhetoric as Italy. It also has facilitated financial Anglo-American pro-market approach is and displaced efforts.3 One prime exam- market integration and possibly inter- viewed more and more suspiciously. These ple of this is the glorified “Lisbon process” regional trade and may have increased tendencies are ingrained in European cul- that sets detailed targets on socioeco- cross-national price competition. ture and reflect the history of ideas of this nomic variables, identical for all countries On the other hand, it has imposed continent.6 in Europe, and all to be reached within the same monetary policy on all country Europeans talk about a “European a certain time period.

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