rkers into employment will mean more jobs, but this will be associated with lower overall productivity.
In comparing labour productivity levels across countries, such considerations of a comparative-static nature can be useful. There appears to be widespread agreement that measured labour productivity in Europe relative to the US may be upwardly biased as a result of the exclusion of more low productivity workers. Indeed, the EU employment rate falls short of the US level by some 10 percentage points, with lower participation rates and higher unemployment rates disproportionately affecting low skill workers. In a similar vein, the capital-labour ratio appears to be typically higher in the EU than in the US, driving up measured labour productivity in Europe. Thus, both economic theory and a quick inspection of a few aggregate figures suggest that one should control for these effects in productivity comparisons. Obviously, in consequence, a Europe at full employment may well see a significantly larger labour productivity gap vis-Г -vis the US than the current actual figures suggest.
By how much could the productivity gap rise? A simple calculation could be performed focussing on comparisons of total factor productivity levels, using the following relationship:
(1) Y/L = (K/L) 1-О± . TFP
where Y/L denotes measured labour productivity, TFP is total factor productivity, K/L is the capital intensity of production and 1-О± is the capital-elasticity of output in the constant-returns Cobb-Douglas case. For the calculation, GDP and the capital stock in PPP are taken from AMECO. Employment is civilian employment (LFS). Hours worked come from the GGDC (Groningen Growth and Development Centre). The results of this simple exercise suggest that the productivity gap between the euro area and the US, shown in the graph below, may be some 6 percentage points wider than the actual figures indicate.
Graph 1 : TFP and labour productivity gap
В
Source: Commission services
However, the notion of a negative relationship between employment and productivity levels emerging in comparative-static considerations should not be confused with a genuine trade-off between employment and productivity in a long-run dynamic sense. One of the "big" stylised facts in economics is that in the long run technical progress is neutral with respect to employment. History has told us that the process of capital accumulation and technological innovation has not meant the "End of work" and despite notions of "factories without workers", it is clear that from an overall perspective workers have not been replaced by machines. In standard economic growth theory this long-run neutrality proposition has been captured by the concept of labour-augmenting technical progress. Along this balanced growth path, labour productivity, real wages and the capital intensity of production ...
