Why is Productivity Growth in the Euro Area so Sluggish?

IMF Working Papers, October 1, 2004

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Slow productivity growth has plagued the euro area since the mid-1990s.
The deceleration in labor productivity in the euro area was caused by structural changes in wage formation that:
- affected the relative price of labor,
- increased the labor intensity of growth,
- and reduced the rate of capital deepening.
Technological shocks seem to have played a minor role in explaining slower productivity growth in the euro area.
A surge in capital deepening and, mainly, TFP growth in key service industries in the United States explain a large part of the productivity growth gap between the two regions in the second half of the 1990s.

Structural changes in wage formation altered the relative price of labor.
Higher labor intensity of growth led to lower capital deepening, contributing to slower labor productivity growth.
Technological shocks are assessed as a minor explanatory factor for the euro area slowdown.

The United States experienced large productivity gains during the same period.
The productivity growth gap in the second half of the 1990s is largely explained by:
- a surge in capital deepening in the United States,
- and primarily strong TFP growth in key U.S. service industries.

Subject: Capital productivity, Labor, Labor productivity, Production, Productivity, Total factor productivity
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