GDP Growth in the Developed

¶ … GDP growth in the developed world. The fundamental question that will be addressed is: why has the U.S. GDP growth been consistently higher than in the major economic powers of the European Union since 1982? A secondary question is: why is the unemployment rate (or more accurately, the percentage of people of working age employed) so much higher in the United States than in the major countries of Western Europe?

This analysis will focus primarily on France, Germany and Italy, with some mention of the United Kingdom. The reason for these three countries is (1) they represent the largest GDP in the European Union, (2) the economic policies of France, Germany and Italy have been roughly similar, and (3) by focusing on these countries, the analysis will not be skewed by the newly-emerging economic powers in Europe, including Spain, Portugal, Eire, Poland, Hungary and the Czech Republic. Although the growth of these countries has been a good deal higher than the rest of the European Union, they emerged from a much smaller base.

The primary focus on this analysis is relative productivity per person, supplemented by an analysis of population growth and tax policies. Although productivity per person can be expressed fairly easily as GDP per capita, there are components of productivity which help the economist understand the underlying causes of productivity differences.

Government policy plays an important role in all five countries analyzed. Of particular interest are tax policies, employment rigidities (how easy/hard is it to hire or fire an employee?), employee benefits costs, mandatory (statutory) retirement age, and education policy. In addition, the amount that each country spends on education, unemployment compensation and other social welfare benefits makes a significant difference in the incentives for productivity improvement.

The average productivity per person in the United States is $41,640, measured in 2006 (Economist). That figure compares to the following GDP per person in the countries analyzed:

Country

GDP/Person

PPP GDP per Person (Antweiler)

United States

United Kingdom

France

Germany

Italy

This difference in productivity per person has been maintained and even widened since 1982, when Ronald Reagan took office and the employment rate in the United States started to climb. The key contributors to this difference have been:

More years worked in the U.S. The average retirement age in the U.S. is 65, whereas it ranges between 57 (Italy) and 62 (Germany). In Germany, the average college student graduates at age 27. The German worker therefore only has 35 working years, as compared to the average American's 43 years; that marks a difference of 38% longer working time for college graduates.

Better education in the U.S. Germany only has 46% of its students enrolled in tertiary (college) institutions, compared to 72% in the U.S. The same is true of the other European countries. The U.S. spends 2.7% of GDP on education, compared to less than 2% in these other countries (Economist).

Lower costs for employment in the U.S.: The social costs associated with employment average over 40% in Germany, Italy and France, whereas they are less than half that in the U.S. (Hahn). These costs make it more expensive to hire employees. The result is that the unemployment rate in the above-mentioned European countries is double that of the U.S. (Economist). In addition, the employment rate in the U.S. is considerably higher than in Europe -- meaning that many more people of working age are in the workforce.

Lower social benefits for the unemployed. In the U.S., unemployment benefits last generally for only 6 months. They last two years or longer in Europe. That means that there is less reason for Europeans to get off the dole and go back to work -- this has a detrimental impact on productivity.

Protectionism is higher in Europe. Europe averages higher import tariffs and non-tariff barriers in Europe than in the United States. As a result, protected industries from steel to agricultural products have less incentive to move productivity to world levels. (Stokes)