7 - Drivers of productivity growth in Europe

Summary

Paths for productivity growth in Europe

In this book we have documented and analysed Europe's productivity performance since the mid 1990s and compared it to growth since the 1970s, as well as to the productivity record of the United States. On both counts, Europe's performance has been disappointing as labour productivity growth has seriously slowed since 1995, while it has accelerated in the United States. In this book we have analysed the determinants of Europe's poor productivity performance using a new database on productivity at the industry level, the EU KLEMS database.

While our findings confirm the established view that the growing role of ICT and continued improvements in human capital are important drivers of labour productivity growth, this appears not to be the main reason that Europe has failed to show faster productivity growth. While there are differences across European countries and between Europe and the USA, ICT investment has become a more important source of growth everywhere, as illustrated in Chapter 3. Slower productivity growth in Europe since the mid 1990s has been mainly related to a slowdown in the efficiency with which labour and capital are used, as measured by multi-factor productivity (MFP) growth. Indeed one key finding of Chapter 2 is that European growth could benefit from exploiting the increased potential for productivity growth in market services. In contrast to earlier suggestions in the literature, services industries such as trade and business services may see rapid labour productivity growth, as evidenced by the US experience.