We analyse the evolution of regional employment in EU countries, and present some econometric models which relate employment with wages, economic growth and productivity. This study points to the main causes the important regional disparities of wages and rates of employment that exist in EU15 and EU24, as well as the low level of the average rate of employment in comparison with the USA and other areas. Finally we suggest some European policies that should be have into account in order to foster employment and real wages in the less developed regions as well as the average rate of employment of European Union.

M.Carmen Guisan

M.Teresa Cancelo

English

Research Papers in Economics

Wages, Employment and Productivity in EU and the USA. Guisan,M.C. and Cancelo,M.T. ERSA2004 
  1
 
Wages, Employment and Productivity in European Union and comparison with the USA. 
 
By GUISAN, M.Carmen eccgs@usc.es 
 and CANCELO, M.Teresa 
Faculty of Economics. University of Santiago de Compostela, Spain 
 
Abstract:  
 
We analyse the evolution of regional employment in EU countries, and present some 
econometric models which relate employment with wages, economic growth and 
productivity. This study points to the main causes the important regional disparities of wages 
and rates of employment that exist  in EU15 and EU25, as well as the low level of the average 
rate of employment in comparison with the USA and other areas. Finally we suggest some 
European policies that should be had into account in order to foster employment and real 
wages in the less developed regions as well as the average rate of employment of European 
Union. 
 
 
1.- Introduction 
 
      European policies for regional development need to be improved in order to reach so good 
levels as the USA regarding average real wages and high rates of non-agrarian employment. 
European Union has developed policies as those outlined in the White Paper of the European 
Commission(1994) which are not enough to reach the same levels of the USA. One of the 
main differences between EU and the USA is the different procedures to advise political 
economies, while in the USA many outstanding economists participate in Advisory Boards 
and the newspapers and television channels have a role in the discussion among experts on 
the main economic policies, in the European Union the opinion of experts is not so frequently 
asked for by the Commission and the role of newspapers and televisions in this regard is 
usually only focused on national policies but not in European policies.  
 
      In section 2 we present a comparative analysis of employment and wages in EU and the 
USA. In section 3 we present a general view of the regional differences in the rates of 
employment by sector and in GDP per inhabitant in European Union after the Enlargement of 
year 2004 to 25 countries. In section 4 we present some econometric models related with 
employment and wages, and finally in section 5 we present the main conclusions. 
 
2.- A comparative analysis of employment and wages in EU countries and the USA. 
 
          The European Union has shown in the last decades of the 20
th century a worse 
performance than the USA in relation with employment creation and the level of average 
wages. Graphs 1 to 4 show the differences between EU15 and the USA in relation with 
employment and wages, for the period 1964-2000.  
 
      In graphs 1 and 2 we see that the rate of total employment, as well as the rate of wage 
earners, per one thousand inhabitants in European Union is very similar in 1964 and 2000, 
and clearly below the USA values, while the rates of employment in the USA have 
experienced an important increase during the period 1964-2000. 
 Wages, Employment and Productivity in EU and the USA. Guisan,M.C. and Cancelo,M.T. ERSA2004 
  2
Graph 1 
Total Employment per one thousand inhabitants in Europe and the USA 
360
380
400
420
440
460
480
500
1965 1970 1975 1980 1985 1990 1995 2000
USA
EU15
 
 
 
Graph 2 
Number of Employees per one thousand inhabitants in Europe and the USA 
280
320
360
400
440
480
1965 1970 1975 1980 1985 1990 1995 2000
USA
UE15
 
 
     Regarding the average real wages we find that the evolution has been also more favourable 
in the USA than in the European Union of 15 countries, EU15, both at Exchange Rates (W) or 
at Purchasing Power Parities (WPP). The ratio between WPP of EU15 and the real wage of 
the USA has increased substantially during the period 1964-1980, from less than 50% to 
nearly 75%, but it has not had a good evolution during the period 1980-2000. Although there 
are some effects of the unification of Germany in the decrease of year 1991, this is only an 
small part of the general decrease of the period 1990-2000, which seems to be due to special Wages, Employment and Productivity in EU and the USA. Guisan,M.C. and Cancelo,M.T. ERSA2004 
  3
problems of European countries in relation with economic development and employment 
policies. 
 
Graph 3. Real wages in dollars at 1990 prices 
10
15
20
25
30
35
40
1965 1970 1975 1980 1985 1990 1995 2000
USA
EU15-PP EU15-ER
 
 
Graph 4 
Ratio between average real wage at PPPs of EU15 and the USA 
.45
.50
.55
.60
.65
.70
.75
.80
1965 1970 1975 1980 1985 1990 1995 2000
 
      The sources of data were OCDE Labour Force Statistics for Total Employment (LT) and 
Wage Earners (LW), and OCDE National Accounts for Compensation of Employees (CE). 
Data of average monetary wages, as to say at current prices, were calculated by means of the 
ratio between CE and LW(WM = CE/LW), while average real wages where calculated by 
means of the ratio between WM and the Price of Consumption Index for each country and 
expressed in dollars at 1990 prices and Exchange Rates (ER),  (W = (WM/PCI)/ER90), or at 
1990 prices and Purchasing Power Parities (PP), (WPP = (WM/PCI)/PP90). 
 
      We must realize that these real wages are gross, before fiscal taxes on labour income, and 
thus the differences would be even more favourable for the USA if we would make the Wages, Employment and Productivity in EU and the USA. Guisan,M.C. and Cancelo,M.T. ERSA2004 
  4
comparison with real net wages, after fiscal taxes deduction, as those taxes are lower in the 
USA. 
 
      The differences in income per inhabitant and wages among European regions are, on the 
other hand, higher than in the case of the USA, even before the 2004 Enlargement form 15 to 
25 countries, and thus it is very important for people leaving in the less developed regions of 
EU to insist upon the convenience of improving European labour policies, both regarding 
employment and wages, with a main emphasis of the diminution of regional disparities 
improving policies specially in the less favoured regions. 
 
     Many economic researchers in several publications and communications at Congresses, as 
many of the interesting meetings organized by ERSA during the last two decades, have tried 
to make useful recommendations to European Union in this regard, but unfortunately very 
few of their suggestions have got to be know by politicians and public opinion, because there 
are not enough channels to create public opinion sectors in Europe as a whole.  
 
     Televisions,  newspapers,  publishers  of  books and journals, even of academic journals, 
have usually only a national focus on only a small part of Europe and very few have a broader 
European view. The obsolete and distant Euro-bureaucracy has not helped much in this regard 
to facilitate bilingual or multilingual translations of research recommendations to improve 
debates and interchange of ideas of European economic researchers among themselves and 
with politicians. In some countries like Spain and Portugal there is besides that an important 
problem due to the rigid electoral system which gives more power to the internal high level 
bureaucracies of parties than to the general wish of the citizens which are only allowed to 
choose a political party  but not the persons who will become their representatives, because 
they only can vote to a closed and blocked lists, in many cases with 10 or more names, 
selected by the leaders of the parties.  
 
    European Union need to get next to citizens and the reforms to be performed in the next 
years are really important. To follow similar policies to the USA in the improvement of 
economic and social research will be indeed important to improve employment and 
development at regional level. 
 
     On section 3 we analyse regional differences of employment rates and real income per 
inhabitant in EU25. In section 4 we present some econometric models which explain the 
different evolution of EU15 and the USA, and finally in section 5 we present the main 
conclusions. 
 
3.- Regional differences of employment and income per inhabitant in EU25 regions. 
 
 
      Graphs 5 to 7  show the distribution of the rates of employment by sector in 151 European 
regions of 25 countries in year 2000. There we can see that there are many regions with very 
low values of employment. 
 
      Graphs 8 and graph 9 show the positive correlation existing between the rate of non-
agrarian employment (LHNA) and Gross Domestic Product per inhabitant (QH) in 151 
regions of EU25 in year 2000. 
 
 Wages, Employment and Productivity in EU and the USA. Guisan,M.C. and Cancelo,M.T. ERSA2004 
  5
                      Graph 5. Regional distribution of the rate of employment of Agriculture 
0
4
8
12
16
20
24
0 20 40 60 80 100 120 140
Series: LHA00
Sample 1 151
Observations 151
Mean        29.21628
Median    22.22774
Maximum   146.0272
Minimum   0.705012
Std. Dev.    27.49715
Skewness    2.109360
Kurtosis    7.829170
Jarque-Bera  258.7038
Probability  0.000000
 
 
 
                Graph 6. Regional distribution of the rate of employment of Industry and Building 
0
4
8
12
16
60 80 100 120 140 160 180 200
Series: LHI00
Sample 1 151
Observations 151
Mean        123.0033
Median    119.0998
Maximum   214.2708
Minimum   47.78480
Std. Dev.    33.95422
Skewness    0.353832
Kurtosis    3.108489
Jarque-Bera  3.224845
Probability  0.199404
 
 
Graph 7. Regional distribution of the rate of employment of Services 
0
2
4
6
8
10
12
14
16
160 200 240 280 320 360 400
Series: LHS00
Sample 1 151
Observations 151
M ean        258.7789
Median    258.4742
Maximum   400. 4636
Minimum   136. 4850
Std. Dev.    55.62225
Skewness    0.294299
Kurtosis    2.622906
Jarque-Bera  3.074411
Probability  0.214981
 
 Wages, Employment and Productivity in EU and the USA. Guisan,M.C. and Cancelo,M.T. ERSA2004 
  6
 
 
 
                Graph 8. Rate of non-agrarian employment (LHNA) and Gdp per inhabitant (QH) 
 
200
250
300
350
400
450
500
550
0 20000 40000 60000
QH00PP
L
H
N
A
0
0
LHNA00 vs. QH00PP
 
 
                     Graph 9. Ranking of the rate of non agrarian employment and ranking of QH 
0
40
80
120
160
0 40 80 120 160
RQH
R
L
H
N
A
RLHNA vs. RQH
 Wages, Employment and Productivity in EU and the USA. Guisan,M.C. and Cancelo,M.T. ERSA2004 
  7
 
 
4.- Econometric models for non-agrarian employment and wages in EU countries. 
    
     Model 1 presents a cross-country model for 11 European Union countries for non agrarian 
employment, LNA, in the period 1991-2000, where LNA is expressed as a function of its 
lagged value and the increase in real GDP and real wages, at 1999 prices. 
 
                Model 1 Log-linear model for LNA  
Dependent Variable: LOG(LNA?) 
Method: Pooled Least Squares 
Sample(adjusted): 1991 2000 
Included observations: 10 after adjusting endpoints 
Number of cross-sections used: 11 
Total panel (balanced) observations: 110 
White Heteroskedasticity-Consistent Standard Errors & Covariance 
Variable Coefficient Std.  Error t-Statistic Prob. 
LOG(LNA?(-1)) 0.999345 0.000296 3374.615 0.0000 
D(LOG(GDP99?)) 0.704718 0.073715 9.560092 0.0000 
D(LOG(W99?)) -0.043407 0.079492 -0.546057 0.5862 
R-squared  0.999757     Mean dependent var  8.718878 
Adjusted R-squared  0.999752     S.D. dependent var  1.031234 
S.E. of regression  0.016241     Sum squared resid  0.028222 
F-statistic  219687.8     Durbin-Watson stat  1.453594 
Prob(F-statistic) 0.000000      
 
 
         Model 2 presents the relation between wages and productivity in 23 OECD countries, 
including EU15 countries, during the period 1965-2000. We have included also an indicator 
of the level of employment, with a positive effect on wages according to the expected sign, 
and trend represented by time (TI) in order to have into account other effects. 
 
                       Model 2. Relation between wages and productivity in OECD countries 
Dependent Variable: W90?PP 
Method: Pooled Least Squares 
Sample(adjusted): 1965 2000 
Included observations: 36 after adjusting endpoints 
Number of cross-sections used: 23 
Total panel (unbalanced) observations: 731 
White Heteroskedasticity-Consistent Standard Errors & Covariance 
Variable Coefficient Std.  Error t-Statistic Prob. 
W90?PP(-1) 0.997790 0.004315 231.2493 0.0000 
D(PM?PP) 0.335643 0.040621 8.262883 0.0000 
(LT?(-1)/POB?(-1)) 1.285168 0.178127 7.214887 0.0000 
TI -0.017075 0.002679 -6.374496 0.0000 
R-squared  0.989444     Mean dependent var  20.28128 
Adjusted R-squared  0.989401     S.D. dependent var  5.506496 
S.E. of regression  0.566907     Sum squared resid  233.6454 
Log likelihood  -620.3516     F-statistic  22715.42 
Durbin-Watson stat  1.563532     Prob(F-statistic)  0.000000 
 Wages, Employment and Productivity in EU and the USA. Guisan,M.C. and Cancelo,M.T. ERSA2004 
  8
5.- Conclusions. 
 
    European Union has many challenges after the Enlargement of the year 2004 in order to 
improve real income per inhabitant, real wages and the rates of employment. The data and 
models here present show a high superiority of the USA in comparison with European Union 
and suggest the convenience of change in excess bureaucracy of EU and to improve 
communication of EU institutions with citizens and economic researchers. Changes in 
European wide focus of newspapers and social means of communication are also needed. 
 
 
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Wages, Employment and Productivity in EU and USA

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