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European Stagnation and American Growth.

GUNTER GABISCH [*]

It is a rather common and well-known behavior to begin with stylized facts. So what are the stylized facts with regard to the topic: European stagnation and American growth? In 1997, the real growth rate per capita in the European Union was 2.4 percent. For this year, the lowest growth rate, for Italy, was 1.3 percent and the highest, for Ireland, was 9.6 percent. For 1990 to 1997, real growth rates per capita for some major European countries were: Germany, 0.97 percent; France, 0.82 percent; United Kingdom, 1.64 percent; and Italy, 0.91 percent. As derived from these figures, European stagnation is no stagnation in the narrow sense of the word, it is more a kind of economic growth on a rather low level.

Regarding the U.S., the real growth rate per capita was 1.5 percent for the period 1990-97. Yet, this figure should be analyzed in more detail. Starting in 1990, the real U.S. gross domestic product per capita first decreased, and it took until 1993 to again reach the level of 1990. So the real dynamic in the U.S. started in 1993. The compound annual growth rate from 1993 to 1997 was a startling 2.44 percent. What is really observed here is the fact that for a couple of years, the U.S. real growth rate per capita was about 1 to 2 percentage points higher than those of the major European countries.

Not too long ago, these facts were vice versa. During the 1970s, for example, the real annual growth rate per capita in Germany was 3.03 percent and in the U.S., 2.08 percent. That is, for 10 years, the growth rate in Germany was 1 percentage point higher than in the U.S.

The first part of this economic analysis begins with trend and cycle. The trend can be explained by a dynamic theory of production, that is, it is determined by the supply side, while the cycle can be explained by the demand side. So what is being observed? Is it more a trend phenomenon or more a cyclical phenomenon, or is it perhaps both?

Beginning with the cyclical phenomenon, if the observed differences are not more than a difference in business cycles, there is not much to consider about it. Those differences have been observed for many years. At the utmost, they would be a case for applied business-cycle policy or stabilization policy. However, the case is not that easy.

More detailed observations give rise to more detailed reflections. The rate of unemployment has remained at startlingly high levels for years. In Spain, the rate of unemployment has been 20 percent and more for years. In France and Italy, it is around 12 percent; in Germany, around 9 percent; and for the European Union as a whole, 10 percent and more. Really horrifying is the rate of unemployment for younger people, those 25 years old and under. For 1998, the respective unemployment rate for Spain is 35.4 percent; for Italy, 30.8 percent; for Greece, 32.1 percent; for France, 26.6 percent; for Belgium, 22.1 percent; for Sweden, 16.7 percent; and for Germany, 9.8 percent. These are really startling figures and they have remained at these levels for years. In contrast, the U.S. unemployment rate for 1997 was 4.9 percent and has become even lower since then.

The next impressive observation concerns the upcoming new technologies. New companies in telecommunications, software, the internet, and microelectronics are booming in the U.S., creating many new job opportunities. In this way, the vehicle of growth and employment in the U.S. are new technologies and new companies engaged in these technologies.

Of course, Europe has new companies and new technologies, too. For example, in Germany, SAP is the world's biggest software company for business software, and MobilCom shares are valued higher than many industrial giants in the traditional steel and coal sector. Though, by and large, the importance of new technologies and companies is less in Europe than in the U.S.

Will this difference in high tech and high tech companies be the true source of observed growth variations in the long run? Are those variations truly a trend phenomenon? Attention is shifted now from growth rate variations to differences in the labor market. There are considerable differences between the U.S. and Europe, that is, dynamic development in the U.S. and stagnation in Europe. So a few points should be stressed: incentives for work, the shadow economy, and a preference for leisure and immobility.

Incentives can be regarded from both sides of working: if one works, what is earned is taken away, so do not work. If one does not work, one gets what he does not earn. Again, do not work. In the example for Germany, the highest marginal income tax rate is 53 percent. In addition, Germans pay the so-called solidarity share with the consequence that on the margin, they pay about 60 percent in taxes. Of course, middle incomes are taxed lower, but then workers have to pay their contribution to social security, which is about 20 percent of gross income, in addition to the tax burden. On the other hand, if people are unemployed, they receive numerous kinds of financial assistance. So, on balance, it is often preferable to not work rather than to work because the available household income, in both cases, is almost the same. This leads to the second point, the shadow economy.

In the shadow economy, again, it is hardly possible to render precise numbers. However, there is no question about the fact that many unemployed people are working in the black market. They receive social assistance and, in addition, an income gross for net. The sum of both kinds of income can be substantial, preventing those people from returning to the legitimate labor market. A recent estimate of the shadow economy in Germany was about 14 percent of gross domestic product, a dramatic increase within the last 10 to 15 years.

Finally, an apparent difference exists between Europe and the U.S. with respect to individual and social preferences. People in Europe are much less inclined to move to another city or part of a country in order to find a job opportunity than they are in the U.S. To live in a part of the country where a family has lived for centuries is a highly appreciated value and will not be offset by unemployment. The same goes for leisure time. The average German worker gets six weeks of vacation each year, a 35-hour work week, and numerous holidays. In other European countries, the situation is similar. The consequence is that the U.S. labor market is much more flexible than the average European labor market and that U.S. workers work more hours per year than the European worker.

These three circumstances lead to a rather high unemployment rate. However, on a positive note, and a bit ironically, people in Europe are so rich that they can afford high rates of unemployment, both individually and socially.

Surely it may be possible to interpret the observed differences in growth rates between the U.S. and Europe on the grounds of modern endogenous growth models. So the roles and importance of human capital, research and development, external effects, increasing returns to scale, increasing variety of intermediate goods, and so on should be discussed and analyzed in detail. However, these considerations go beyond this introductory remark to this discussion. Perhaps these considerations can be discussed in the future. (JEL P52)

(*.) Georg August Universitat--Germany.
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Author:GABISCH, GUNTER
Publication:Atlantic Economic Journal
Article Type:Statistical Data Included
Geographic Code:1USA
Date:Sep 1, 2000
Words:1282
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