1. How Can Europe Compete? Gavin Cameron University of Oxford OUBEP Topical Economics 2006

2. Oxford University Business Economic Programme 2 the Lisbon Agenda UK and European policymaking with respect to economic growth is bound up with the EU’s Lisbon Agenda: Plan to make the EU ‘the most dynamic and competitive knowledge-based economy in the world’, by 2010. This talk outlines –Europe’s relative performance: GDP per capita, productivity, and labour utilisation; –The Lisbon Agenda: Microeconomic Reforms and Employment Guidelines; –The simple economics of growth and jobs. –Some suggested structural reforms.

3. Oxford University Business Economic Programme 3 GDP Pop = GDP Hour Hours Pop * living standards Economists use a number of different measurements of national income and productivity -the simplest is GDP per capita. More formally, though, GDP per capita is a function of productivity per hour and labour utilisation:

4. Oxford University Business Economic Programme 4 Source: Robert J Gordon (2005)

5. Oxford University Business Economic Programme 5 Source: O’Mahony and Van Ark (2003), figure 1.1.

6. Oxford University Business Economic Programme 6 the sources of productivity growth Growth of labour productivity = weighted growth of capital per worker hour + growth of total factor productivity Growth of total factor productivity –Higher quality products –New varieties of products –Better ways to use existing inputs Capital Hour = GDP Hour * Total Factor Productivity  

7. Oxford University Business Economic Programme 7 growth accounting Capital per worker (K/L) A rise in technology raises the steady-state level of output per capita. Part of this rise (AB) is the pure effect of technical change (TFP), the other part (BC) is due to ensuing capital accumulation. A B C Output per worker, Y/L Output per worker, Y’/L Output per worker (K/L)

8. Oxford University Business Economic Programme 8 Source: O’Mahony and Van Ark (2003), table 1.4b.

9. Oxford University Business Economic Programme 9 Source: O’Mahony and Van Ark (2003), figure III.5

10. Oxford University Business Economic Programme 10 Source: O’Mahony and Van Ark (2003), table III.14.

11. Oxford University Business Economic Programme 11 Source: O’Mahony and Van Ark (2003), table III.5.

12. Oxford University Business Economic Programme 12 Source: O’Mahony and Van Ark (2003), table II.7

13. Oxford University Business Economic Programme 13

14. Oxford University Business Economic Programme 14 labour utilisation Labour utilisation is captured by two broad elements. –Labour intensity is the number of hours worked per worker. –Employment rate is the proportion of the population that is in work. Government policies can affect both of these, for example, by setting maximum working hours or by making hiring & firing more costly. Hours Worker = Hours Population Workers Active * Population *

15. Oxford University Business Economic Programme 15 equilibrium employment employment labour supply, Ls active workforce voluntary NAIRU wage-setting, WS price-setting: firms set a constant mark-up of prices over costs, PS real wage labour demand, Ld involuntary

16. Oxford University Business Economic Programme 16 how to raise employment Need to target three groups: voluntary unemployed, involuntary unemployed, and the inactive: –Reform of the benefit system, especially duration; –Limitations on union power: no closed shops, no secondary picketing, secret ballots; –Changes to wage bargaining, especially increased employer-union coordination; –Tax reform (lower payroll taxes, minimum wages for the unskilled etc); –Flexicurity: Cuts to employment protection, coupled with active labour market policies; –Active Labour Market Policies: training and work experience schemes for long-term unemployed, unskilled, youths, women, older workers; –Increased labour mobility.

17. Oxford University Business Economic Programme 17 how not to raise employment Cunning demand-side policies (unlikely to have much effect in the long- run, plus very expensive); Job-sharing or cuts in working hours; Increased investment by firms (although this will raise wages); Protectionism (any benefit to workers massively outweighed by costs to consumers).

18. Oxford University Business Economic Programme 18 unemployment around the world Source: Faggio and Nickell (2006)

19. Oxford University Business Economic Programme 19 Source: BIS (2006)

20. Oxford University Business Economic Programme 20

21. Oxford University Business Economic Programme 21 Lisbon Agenda reforms Microeconomic Reforms: –The Lisbon Agenda argues that the ‘knowledge economy’ is vital to the future of Europe. –It proposes that the EU should aim to spend 3 per cent of GDP on R&D. –But EU problems not just in the high-technology sector. Employment Guidelines: –Attract and retain employment through modernising social protection; –Improve adaptability of workers and firms and hence flexibility of labour market; –Increase investment in human capital (education and skills). –But strong opposition in many countries to cuts in benefits and employment protection.

22. Oxford University Business Economic Programme 22 growth and jobs Labour Utilisation –In the short to medium-run, aggregate employment in an economy is largely a function of macroeconomic policy. Evidence suggests that strong, balanced, growth tends to raise employment a little, but sectoral reallocation of labour may reduce employment a little. –In the long-run, aggregate employment is mainly affected by the workings of the labour market. Productivity –In the short to medium-run, rising employment may exert downward pressure on productivity and wages, especially if the newly employed are young, unskilled, female, old or are long-term unemployed (and hence have lower productivity than existing workers). –In the long-run, increased capital accumulation will tend to offset this effect and there is little evidence of an effect of employment rates on growth. However, some factors that make employment outcomes worse (such as bad labour relations) may also be bad for growth.

23. Oxford University Business Economic Programme 23 Source: O’Mahony and Van Ark (2003), table I.1.

24. Oxford University Business Economic Programme 24 Source: OECD (2005)

25. Oxford University Business Economic Programme 25 Source: OECD (2005)

26. Oxford University Business Economic Programme 26 summary Recent European economic performance has been weak: –This is particularly the case for labour utilisation. –But also increasingly true for productivity growth. –Weakness especially in agriculture, manufacturing, distribution and financial services. –Strong in utilities, construction, communications. Lisbon agenda unlikely to help soon: –Too focussed on high-tech; too little on low tech and job creation. –European workers, especially the long-term unemployed unskilled, women, youths and older workers need pathways to work. –Question marks over willingness of governments to implement agenda, and over ability of ECB and finance ministries to co-ordinate macroeconomic policy. But Europe is very diverse, so difficult to generalise!