Riccardo DiCecio

English

Research Papers in Economics

November 2005 InternationalEconomicTrends
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
A
verage labor productivity—i.e., the amount of output
produced per unit of labor—is a key determinant of
the long-run economic performance of a country.
Over the past 10 years, productivity growth rates among
national economies have contrasted strikingly: productivity
grew at an average annual rate of 2.3 percent for the United
States, 1.7 percent for the United Kingdom, 1.4 percent for
Japan, and 0.9 percent for the euro area.
Labor productivity growth rates could differ among coun-
tries according to where each country is along the business
cycle. Also, faster technological progress or a greater capital
intensity (i.e., workers using more machines to produce
things) could have generated faster productivity growth in
the United States. In a recent study,1 Skoczylas and Tissot
analyzed productivity developments across industrial countries
and argue that, even when differences in the business cycles
or capital intensity are taken into account, U.S. productivity
growth rates stand out in any international assessment.2
Many analysts have cited the IT revolution as a possible
explanation of the high rate of U.S. productivity growth. But
the U.S. advantage in average labor productivity has persisted
despite the recent slump in IT investment in the United States
and the sustained rates of investment in IT in other industrial-
ized countries. This fact makes it less likely that the IT revolu-
tion is the sole explanation of U.S. productivity growth.
Legal and cultural flexibility in economic relationships,
however, might help explain the higher U.S. productiv-
ity growth. Since the 1970s, U.S. economic laws
and regulations have fostered increasing flexibility
compared with those of its industrialized trading
partners. For example, U.S. firms find it is easier
and cheaper to hire (and fire) workers and to start
(and end) a business activity. This flexibility makes
it easier for markets to relocate workers from lower-
productivity firms and sectors to more productive
occupations. Also, more competitive markets for
goods and services can provide greater incentives
for technological innovation and adoption as firms
strive to keep ahead of their competitors. The U.S.
retail sector, for example, leads the world partly
because it is so competitive domestically. 
The experience of the United Kingdom, which
undertook structural reforms similar to those of
the United States, supports the view that economic flexibility
has contributed to U.S. productivity growth rates. Like the
United States, the United Kingdom has experienced not only
a sharp decline in manufacturing’s share of total employment
but also better labor productivity growth than most countries.3
Nobel laureate Ed Prescott suggests a different explanation:
Lower taxes on labor income make Americans more willing
to work.4 Prescott observes that differences in hours worked
per person explain most of the differences in output per
worker across industrialized countries in the 1990s. On the
other hand, output per hour worked is similar across countries. 
In the past, persistent differences in productivity across
industrial countries have typically been reversed. Yet, while
U.S. productivity growth has slowed recently, there is little
evidence of faster productivity growth in the euro area or
Japan. Hence, the differences evident in the chart are likely
to persist in the near future.
—Riccardo DiCecio
1 Les Skoczylas and Bruno Tissot, “Revisiting Recent Productivity
Developments across OECD Countries,” Working Paper No. 182, Bank for
International Settlements, October 2005.
2 Skoczylas and Tissot discuss the measurement issues that make it difficult
to study productivity at the national level and complicate cross-country 
comparisons.
3 See “Industrial Metamorphosis,” The Economist, October 1, 2005.
4 Edward C. Prescott, “Why Americans Work So Much,” Federal Reserve
Bank of Minneapolis Quarterly Review, July 2004, 28(1), pp. 2-13.
Cross-Country Productivity Growth
130
125
120
115
110
105
100
1995 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
U.S.
U.K.
Japan
Euro Area
Labor Productivity (output per worker, 1995 = 100)
Consult ALFRED™, our new source of vintage economic data, at research.stlouisfed.org/tips/alfred/.

Cross - country productivity growth

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Cross - country productivity growth

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