Transcript Document

Thorvaldur Gylfason
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Comparison of Europe’s economic
performance with that of the United States
Three suggestions
o Output per hour worked – that is, labor productivity
– is a better measure of economic performance than
output per person
o Output, like assets, might be better viewed in two
dimensions: average level of output, or income, and
its distribution across the population
o Anthropometric studies might help quantify the
missing dimension
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Leaves out
◦ Domestic production (child rearing)
◦ Black economy (drugs trade)
◦ Changes in macroeconomic stocks
 Environmental pollution (green national accounting)
 Accumulation of external debt
 Exchange rate problem has been solved by ppp adjustments
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Does not accord well with measures of happiness
Does not take into account the effort behind the
output, especially work
GDP per hour says more than GDP per capita
◦ Reflects efficiency, that is, labor productivity
◦ Sustainable GDP divided by an index of input use would
be a still better measure of economic performance
Luxembourg
U.S.A
Norway
Ireland
Iceland
Switzerland
Austria
Australia
Denmark
Canada
U.K.
Sweden
Netherlands
Belgium
France
Finland
Japan
Germany
Spain
Italy
New Zealand
Greece
Slovenia
Cyprus
South Korea
Portugal
Czech Republic
Malta
Hungary
Slovak Republic
Estonia
Lithuania
Poland
Latvia
Turkey
0
10,000
20,000
30,000
40,000
50,000
60,000
South Korea
Lithuania
Latvia
Cyprus
Estonia
Poland
Slovenia
Slovak Republic
Malta
Czech Republic
Turkey
Greece
U.S.A
Iceland
Hungary
Spain
Canada
New Zealand
Australia
Japan
Portugal
Finland
Ireland
U.K.
Italy
Belgium
Sweden
Switzerland
Austria
Denmark
Luxembourg
Germany
France
Norway
Netherlands
0
500
1,000
1,500
2,000
2,500
Germany
Luxembourg
Belgium
Netherlands
Ireland
Norway
Iceland
Portugal
France
Austria
Denmark
Switzerland
U.K.
Sweden
Turkey
Greece
Finland
Canada
Italy
Australia
New Zealand
Spain
Japan
U.S.A
0
2
4
6
8
10
12
14
16
18
Luxembourg
Norway
France
Ireland
Belgium
Austria
Netherlands
U.S.A
Germany
Denmark
Sweden
U.K.
Finland
Italy
Switzerland
Australia
Canada
Japan
Iceland
Spain
Greece
New Zealand
Malta
Hungary
Portugal
Slovenia
Czech Republic
Cyprus
Slovak Republic
South Korea
Poland
Estonia
Lithuania
Latvia
Turkey
Inefficiency (high food
prices, etc.)
necessitates more work
and results in less
output per capita than
otherwise, as in Japan
0
10
20
30
40
50
60
70
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Europe loves leisure (Blanchard)
European labor unions reduce work (Alesina)
Europe’s heavy tax burden reduces willingness to
work (Prescott)
European values – economic culture! – is different
than in the US (Phelps)
Conclusion: Perhaps Europeans want to work less
than Americans
◦ But voluntary reduction in work need not be a sign of
weakness, on the contrary
◦ Double benefit of growth and increased welfare: Higher
income, less work
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25-50 year old wage earners
◦ Same labor force participation in Europe and US
◦ Suggests similar propensity to work, similar values
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Wage earners in their 60s
◦ Three out of four European wage earners have quit work
◦ Half of US wage earners continues to work
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Workers in their 70s
◦ Nine out of ten European wage earners have quit work
◦ A fourth of US wage earners continues to work
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Perhaps Europeans can afford to retire earlier
than Americans?
◦ Europe: More social security, more equality, more time
◦ US: Higher income per capita
70
Luxembourg
GDP per hour (USD, ppp)
60
Norway
France
Ireland
US
50
Finland
40
Greece
30
Americans work
more than all other
high-income nations
except the Greeks
20
10
Korea
Turkey
0
0
500
1,000
1,500
2,000
Hours of work per employee per year
2,500
3,000
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How to explain preceding chart
1. Increased labor productivity enables people to
work less
 More efficiency permits more leisure
 Backward-bending labor supply schedule
2. Too much work tends to reduce efficiency
 Tired hands make mistakes
3. What we see is simply a downward-sloping labor
demand curve
 Increased labor productivity and thereby higher wages
reduce demand for labor
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Probably all three explanations apply
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Despite world’s second highest GDP per capita,
US workers need to work hard: Why?
◦ Stronger work ethic in US
◦ Lower taxes encourage work
◦ Less public consumption calls for more private
consumption and hence more work
◦ Weaker labor unions price fewer workers out of jobs
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One further hypothesis
◦ Large inequalities in US reduce efficiency
 Does not show in GDP per capita, but is visible in GDP
per hour because social security permits less work
◦ So, assess economic performance in two dimensions
 Return and risk (income level and inequality)
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View national economy like an asset
Assets carry returns and entail risks
Return is directly related to risk
◦ Few prefer no risk, because then the associated
return becomes too small
◦ Few seek maximum return, because then the
associated risk becomes too large
◦ Most stake out an intermediate position, balancing
the desire for a high return against the desire to
keep risk low
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Does this idea apply to the national economy?
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Anarchy: Income distribution is fair, if all have
same opportunities and free markets produce
inequality without government intervention
Intervention: Income distribution is fair, if all
have same opportunities and government
secures that ...
◦ Rawls: The poor have the highest possible incomes
◦ Rawls in reverse: The rich have the highest possible
incomes (you know who I mean)
◦ Middle road: The middle class has the highest
possible incomes
◦ Another middle road: Average income is at a
maximum without excessive inequality
Efficiency (income per capita)
Equality and Efficiency
Increased equality
reduces efficiency
Utopia?
France
Sweden
Increased equality
increases efficiency
South-Africa
Where is the
optimum?
Equality
Efficiency (income per hour worked)
Equality and Efficiency
France
Increased equality
reduces efficiency
US
Sweden
Increased equality
increases efficiency
South-Africa
Equality
1
A
B
C
D
E
F
G
H
I
J
Mean
Standard dev.
Gini
20/20
2
10
10
10
10
10
10
10
10
10
10
10
0
0
1
5
5
7
7
9
9
13
14
15
16
10
4.2
25
3.1
3
5
5
5
5
5
15
15
15
15
15
10
5.3
28
3
4
3
4
5
6
8
9
11
16
18
20
10
6.1
36
5.4
5
2
4
5
6
7
8
12
15
16
25
10
7.0
40
6.8
6
7
8
9
10
2
2
2
2
2
10
10
20
20
30
10
10.1
56
12.5
1
2
2
3
4
4
4
10
30
40
10
13.6
66
23.3
1
1
1
2
2
3
3
7
20
60
10
18.5
78
40.0
1
1
1
1
1
1
2
2
15
75
10
23.2
86
45.0
0
0
0
0
0
0
0
0
0
100
10
31.6
100
Gini index of inequality
100
90
80
70
60
50
Gini index mirrors
the standard
deviation of the
income distribution
40
30
20
10
0
0
5
10
15
20
Standard deviation
25
30
35
70
Gini index
is closely related to
the 20/20 ratio
60
20/20 ratio
50
40
30
20
10
0
0
20
40
60
80
Gini index of inequality
100
120
Bandaríkin
US
Tyrkland
Turkey
Portúgal
Portugal
Eistland
Estonia
Nýja-Sjáland
New
Zealand
Bretland
UK
Ítalía
Italy
Írland
Ireland
Ísland
Iceland
Grikkland
Greece
Ástralía
Australia
Pólland
Poland
Lettland
Latvia
Spánn
Spain
Sviss
Switzerland
Kanada
Canada
Frakkland
France
Litháen
Lithuania
Suður-Kórea
South
Korea
Holland
Netherlands
Lúxemborg
Luxembourg
Austurríki
Austria
Slóvenía
Slovenia
Germany
Germany
Ungverjaland
Hungary
Finnland
Finland
Slóvakía
Slovakia
Noregur
Norway
Tékkland
Czech Republic
Svíþjóð
Sweden
Belgía
Belgium
Japan
Japan
Danmörk
Denmark
20
25
30
35
40
45
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Americans do not live as long as Europeans
◦ 1960: Ten months shorter lives in US
◦ 2003: Fifteen months shorter lives in US
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White Americans used to be taller than
Germans, now Americans are shorter
◦ 1960: Americans were 2-3 cm taller
◦ 2000: Americans are 2-3 cm shorter
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Human stature depends mostly on social
conditions in youth, and is final
◦ Reflects past economic conditions
◦ Nutrition, environment, health, housing, stress
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Is America lagging behind Europe?
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West-Germans, 20-70 years old, men and
women, are on average 1 cm taller than EastGermans
US high-income earners, of both genders and
of all ages, are on average 1-2 cm taller than
US low-income earners
College-educated Americans, of both genders
and of all ages, are on average 3-4 cm taller
than those Americans who have acquired no
education beyond primary school
Netherlands
184
Denmark
183
males (cm)
Average height of fully grown
185
182
181
Czech Republic
Sweden
180
Norway
Belgium
179
Germany
Canada
Finland
178
Austria
Australia
Switzerland
France
177
Spain
US
Italy
UK
176
20
25
30
35
Gini index of inequality, various years
40
45
Prisoners per 100,000 inhabitants
800
US
700
600
500
400
Estonia
Latvia
300
Lithuania
Poland
Czech Republic
200
New Zealand
Portugal
100
Slovenia
Iceland
Turkey
0
20
25
30
35
Gini index of inequality, various years
40
45
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Europe seems to be catching up with the US
Seven European countries already produce
more output per hour than the US
Europeans have grown taller than Americans
since1960
◦ In US, a poor underclass reduces average stature
and labor productivity, not in Europe
◦ This shows in GDP per hour, but not in GDP per
capita, as Americans compensate by working hard
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Europeans work less than Americans
◦ Europe can afford to work less due to higher and
more equally distributed living standards
◦ Or can it? That is the question