Thorvaldur Gylfason

 Comparison of Europe’s economic performance with that of the United States  Three suggestions o Output per hour worked – that is, labor productivity – is a better measure of economic performance than output per person o Output, like assets, might be better viewed in two dimensions: average level of output, or income, and its distribution across the population o Anthropometric studies might help quantify the missing dimension

 Leaves out ◦ Domestic production (child rearing) ◦ Black economy (drugs trade) ◦ Changes in macroeconomic stocks  Environmental pollution (green national accounting)  Accumulation of external debt  Exchange rate problem has been solved by ppp adjustments  Does not accord well with measures of happiness  Does not take into account the effort behind the output, especially work  GDP per hour says more than GDP per capita efficiency ◦ Reflects efficiency, that is, labor productivity ◦ Sustainable GDP divided by an index of input use would be a still better measure of economic performance

Inefficiency (high food prices, etc.) necessitates more work and results in less output per capita than otherwise, as in Japan

leisure  Europe loves leisure (Blanchard) labor unions  European labor unions reduce work (Alesina) tax burden  Europe’s heavy tax burden reduces willingness to work (Prescott) values  European values – economic culture! – is different than in the US (Phelps)  Conclusion: Perhaps Europeans want to work less than Americans ◦ But voluntary reduction in work need not be a sign of weakness, on the contrary ◦ Double benefit of growth and increased welfare: Higher income, less work

 year old wage earners ◦ Same labor force participation in Europe and US ◦ Suggests similar propensity to work, similar values  Wage earners in their 60s ◦ Three out of four European wage earners have quit work ◦ Half of US wage earners continues to work  Workers in their 70s ◦ Nine out of ten European wage earners have quit work ◦ A fourth of US wage earners continues to work  Perhaps Europeans can afford to retire earlier than Americans? ◦ Europe: More social security, more equality, more time ◦ US: Higher income per capita

Americans work more than all other high-income nations except the Greeks

 How to explain preceding chart 1.Increased labor productivity enables people to work less  More efficiency permits more leisure  Backward-bending labor supply schedule 2.Too much work tends to reduce efficiency  Tired hands make mistakes 3.What we see is simply a downward-sloping labor demand curve  Increased labor productivity and thereby higher wages reduce demand for labor  Probably all three explanations apply

 Despite world’s second highest GDP per capita, US workers need to work hard: Why? ◦ Stronger work ethic in US ◦ Lower taxes encourage work ◦ Less public consumption calls for more private consumption and hence more work ◦ Weaker labor unions price fewer workers out of jobs  One further hypothesis ◦ Large inequalities in US reduce efficiency  Does not show in GDP per capita, but is visible in GDP per hour because social security permits less work ◦ So, assess economic performance in two dimensions  Return and risk (income level and inequality)

 View national economy like an asset  Assets carry returns and entail risks  Return is directly related to risk ◦ Few prefer no risk ◦ Few prefer no risk, because then the associated return becomes too small ◦ Few seek maximum return ◦ Few seek maximum return, because then the associated risk becomes too large ◦ Most stake out an intermediate position, ◦ Most stake out an intermediate position, balancing the desire for a high return against the desire to keep risk low  Does this idea apply to the national economy?

 Anarchy  Anarchy: Income distribution is fair, if all have same opportunities and free markets produce inequality without government intervention  Intervention  Intervention: Income distribution is fair, if all have same opportunities and government secures that... ◦ Rawls ◦ Rawls: The poor have the highest possible incomes ◦ Rawls in reverse ◦ Rawls in reverse: The rich have the highest possible incomes (you know who I mean) ◦ Middle road ◦ Middle road: The middle class has the highest possible incomes ◦ Another middle road ◦ Another middle road: Average income is at a maximum without excessive inequality

Equality South-Africa Sweden France Equality and Efficiency Efficiency (income per capita) Increased equality reduces efficiency Increased equality increases efficiency Utopia? Where is the optimum?

Equality Sweden Efficiency (income per hour worked) Increased equality reduces efficiency Increased equality increases efficiency France US Equality and Efficiency South-Africa

A B C D E F G H I J Mean 10 Standard dev Gini /

Gini index mirrors the standard deviation of the income distribution

Gini index is closely related to the 20/20 ratio

US Turkey Portugal Estonia New Zealand UK Italy Ireland Iceland Greece Australia Poland Latvia Spain Switzerland Canada France Lithuania South Korea Netherlands Luxembourg Austria Slovenia Germany Hungary Finland Slovakia Norway Czech Republic Sweden Belgium Japan Denmark

 Americans do not live as long as Europeans ◦ 1960: Ten months shorter lives in US ◦ 2003: Fifteen months shorter lives in US  White Americans used to be taller than Germans, now Americans are shorter ◦ 1960: Americans were 2-3 cm taller shorter ◦ 2000: Americans are 2-3 cm shorter  Human stature depends mostly on social conditions in youth, and is final ◦ Reflects past economic conditions ◦ Nutrition, environment, health, housing, stress  Is America lagging behind Europe?

 West-Germans, years old, men and women, are on average 1 cm taller than East- Germans  US high-income earners, of both genders and of all ages, are on average 1-2 cm taller than US low-income earners  College-educated Americans, of both genders and of all ages, are on average 3-4 cm taller than those Americans who have acquired no education beyond primary school

 Europe seems to be catching up with the US  Seven European countries already produce more output per hour than the US  Europeans have grown taller than Americans since1960 ◦ In US, a poor underclass reduces average stature and labor productivity, not in Europe ◦ This shows in GDP per hour, but not in GDP per capita, as Americans compensate by working hard  Europeans work less than Americans ◦ Europe can afford to work less due to higher and more equally distributed living standards ◦ Or can it? That is the question