Europe—From Catch Up to Jobless Growth

European Economy in 1950

Strategic Bombing

Years of Education

• Working-age adults in 1950– US 11 years– Germany and UK 10.5 years– Japan and France about 9 years– India, Mexico, Brazil 1 to 3 years

Institutions

Bounce Back

Catch-Up Period 1950s – 1970s

• Used a social compact

• Technological Development– Europe never had grand scale manu like the US

Examples of US Techno

Examples of US Techno

Why not in Europe

• Hard to raise the financial capital for the grand scale

• Government Opposition– Both in general and related to the many wars

• Labor Opposition– Look at today and how strong labor unions are in

Europe• We had new techno that had not been

introduced to Europe

US Techno

Comparative Techno Advantage

• Norway—optical-controlled flame cutting

• Italy—textile looms with numerical controls

• Germany—refined cutting lathes

• Holland—oil refining

A European Social Compact

Foreign Direct Investment

• In the 1960s, Europe received a large amount of US foreign direct investment in plants and companies and in sectors like chemicals, computers, and transportation

• This greatly increased Europe’s techno

Beginning of Integration

• After the War, the seed institutions that would move to our current high level of integration

• 1951 Treaty of Paris– European Coal and Steel Community (ECSC)—

Germany,Italy,France,Belgium,Luxembourg,Holland(Coal and steal were needed for weapons)

• 1975 Treaties of Rome– European Economic Community & European Atomic

Energy Community

Did it work?

• Yes!

Example

Early 1970s through Mid 1990s

• Jobless Growth through Investment

• 1950s and 1960s saw extensive growth– Growth from bigger and better factories and more

workers

• Starting in the 1960s they had more intensive growth– Gains from workers doing more and a shift from manu

to services

A Change in the Social Compact?

How Did Unemployment Change

They Needed to Switch to Intensive• They need to switch, but did not want to

• Europe continued with high investment and paid increasingly higher wages—for those who had jobs– US—71 million employed in 1965– US—107 million employed in 1985– Germany—26.2 million employed in 1965– Germany—26.0 million employed in 1985– Similar for the rest of Europe—No New JOBS

– We increase the number of hours worked per capita by 21% (Women) Europe decrease by 21%

Investment

• Europe’s stock of physical capital per hour worked was 82% of the US level in 1973

• It was 100% by 1995 Some above 100%– Austria,Belgium,Finland,France,Germany,Holland

Growth of Per Capita Real GDP

• Between 1973 and 1995, the US and the nations of the Europe Union both grew at 1.8% per year– Germany had same number of people producing

more– US had many more new workers

• We had little increases in productivity and they had unemployment

Unemployment in Europe

• Germany, France, and Italy

– Each had unemployment at or above 6% between 1980 and 2000

– Many years were above 10%

Why Was Europe Unable to Create Jobs?

• In this period they also created very high paying unemployment– Why work when you can collect money• US replaced ½ your income for 6 months

– It is longer today with the recession

• Germany replaced 2/3 for 4 years• Denmark replaced 90% for 2.5 years• Spain replaced 70% for 3.5 years

Do Not Forget About the High Taxes

• If you get a job in Europe, taxes are very high

• The percentage of GDP collected in the US and spent by governments is about 33%

• In Europe it is 50% or more

Europe is Highly Regulated

• Rules that require high levels of benefits to workers– Very high minimum wage– Day care, Maternity leave, Layoff protection

• Rules that limit the freedom of businesses to operate– Some countries can not have Christmas sales– Belgium rules allow only 2 sales per year– Rules that limit hour open– Rules that limit length of workweek– Maybe forbid stores to be open on Sunday– Prevent large stores from opening

Or Maybe Europeans Want More Leisure

• US averages 2 to 3 weeks per year for vacation

• Europe is 10 week or more of vacation– About 1 week of vacation per month for some