BIS Review 27/2005  1  measurement issues currently explain between 0.5 and at most 1 percentage point of the growth differential between the EU and the United States.2 We should consider the upper limit of this range as a litmus test to the question of whether there is a structural growth differential between the EU and the United States. In addition to various measurement differences, about one percentage point of the difference in real GDP growth rates between the EU and the U.S. can be attributed to the higher growth rate of labour input in the U.S. for the period between 1980 and 1995. This is attributable to a stronger increase in the working population in the U.S. and a marked relative decline of effective working hours in the EU. Factors causing this decline in individual labour input can be divided into two categories: First, numerous rigidities in European labour markets were introduced over the past decades: working hour restrictions, minimum wage agreements, and other restrictions on the conditions of hiring and firing employees. These restrictions are often valid over a broad range of sectors and geographic areas irrespective of economic fundamentals. Second, changes in taxing labour evolved over time with significant tax cuts realized in the United States.3 In total, overall labour input for the period 1990 to 1995 increased in the U.S. by an average of 1.2% per annum against a decrease of 0.8% per annum in the EU-13. This is pictured in Graph 2.
In total, the EU-11’s relative position in annual productivity growth worsened by 2.9 percentage points for the period of 2000 to 2003 or by 1.8 percentage points for the period of 1995 to 2000 against the period of 1990 to 1995. The GDP measurement differences I outlined earlier explain at best less than half of this productivity growth gap between the European Union and the United States during the last ten years. Admittedly, we need to be aware of the fact that Europe’s economic performance over this period has been significantly and adversely affected by the terms of German unification. The residual productivity growth gap lies at the heart of the question of why European potential growth has been so weak. To understand the gap, we need to focus on different relative conditions in input as well as output markets. Strongly diverging labour market conditions between the EU and the United States over the decades up to 1995 have led to a massive reduction in EU overall labour input. Rigid labour regulations in Europe restricted labour input and thereby increased the capital-labour ratio which helps explain the higher productivity growth rates in Europe until 1995. From an employment perspective, labour market reforms deserve the high priority they now get by refocusing the Lisbon agenda on “growth and jobs”. 2  See e.g. Nadim Ahmad, François Lequiller et al., ”Comparing Labour Productivity Growth in the OECD Area: The Role of Measurement”, OECD Statistics Working Paper Nr.