grow at the same rate, driven by (exogenous) technical progress. Technical progress is called total factor productivity growth, indicating that this concept should not be seen in a narrow "engineering" sense. Given that TFP determines our standards of living in the long run, clearly policy makers want it to grow faster than in recent years.
Actual labour productivity growth can of course deviate from the balanced labour productivity growth rate over the short-to-medium term due to capital-labour substitution; faster than "Balanced" productivity growth indicates labour shedding, and a shortfall of actual relative to "balanced" productivity growth is a characteristic of what is loosely called labour-intensive growth. Obviously, then, the employment neutrality hypothesis will not hold over the short-to medium term. In consequence, pressing ahead with labour market reforms may entail a temporary reduction in measured productivity growth below full potential, but this should not be regarded as a trade-off in any sense. A higher employment rate implies an unambiguous increase in GDP per capita with no negative implications for the long-run productivity growth of the existing workforce. Thus, there is no inherent problem to act on both fronts simultaneously, raising the "balanced" rate of productivity growth using all the available instruments to stimulate TFP growth, whilst at the same time encouraging the labour-intensive growth in the medium term that is needed to move towards full employment.
2.2 The dynamic employment-productivity relationship in recent years
EU employment and productivity growth patterns have diverged sharply over recent years. Compared with the first half of the 1990's, the period since then has witnessed a significant increase in the contribution of labour to EU GDP growth but unfortunately this has been accompanied by a reduction in the contribution from labour productivity, with labour productivity growth having come down by about one percentage point. From a purely growth accounting perspective, the 1 percentage point decline in EU labour productivity emanates from 2 sources. Firstly, 50% can be attributed to a reduction in the contribution from capital deepening ie lower investment. Secondly, the remaining 50% appears to emanate from a deterioration in total factor productivity i.e. a decline in the overall efficiency of the production process. On top of this, cyclical conditions are estimated to have depressed annual labour productivity growth by around 0.5 percentage points in recent years.
By comparison, over the same timeframe, the US has been able to combine a strong employment performance with acceleration in labour productivity growth. Against this background, this section investigates to what extent the recent slowdown in labour productivity growth may merely reflect a response to a series of positive shocks to labour supply and jobs emanating from st...
