Labour productivity

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Labour productivity (essay) Abstract The analysis in this paper dismisses the notion of a genuine trade-off between employment and productivity growth. Obviously, misguided policies to exploit such a trade-off have to be avoided. However, there are no reasons to think that structural labour market reforms boosting employment will typically entail negative implications for longer-term productivity growth. The dynamic response of productivity to positive labour supply and wage shocks may entail a temporary reduction in productivity growth rates, which, in principle could be considered as benign; anyway, the size of a negative effect of this type is estimated to be fairly small. In particular, this paper reaches the following conclusions: (i) The increase in employment since the

mid 90s has indeed been to a significant extent the result of such positive labour market shocks, with about one half of the additional jobs attributed to structural improvements; (ii) Positive employment shocks can only account for a very small fraction of the observed productivity slowdown; consequently, the decline of labour productivity growth must be considered as predominantly caused by other factors and probably not just a temporary phenomenon. 1. Introduction The so-called Lisbon strategy involves efforts on several fronts both to improve labour market performance and to raise productivity growth in the EU. This twin aspiration is neatly summed up in the phrase ‘more and better jobs’, which implies higher employment rates but also more productive, higher-quality

employment. The strategy sets explicit targets for ‘more jobs’: an employment rate of as close as possible to 70% and a female employment rate of over 60% by 2010. The Stockholm summit a year later added a further target of an employment rate of 50% for older working-age people. Given the rate of employment growth required to meet these targets, the Lisbon conclusions also established an implicit target for productivity growth with the statement that – if the recommended measures were implemented against a sound macroeconomic background – it should be possible to achieve 3% GDP growth. These targets have met with criticism in some quarters on several counts. Some regarded them as over-ambitious, particularly since the European Council (as opposed to individual Member

States) lacks full control of the necessary instruments to meet its objectives. There were doubts about whether a credible strategy had been set out, or even whether EU leaders realised the extent of the reforms that would be required. Others pointed to the risk of policy distortions – there are many ways to raise employment rates, for example, but not all of them are fully consistent with raising economic welfare. On the other hand, the Lisbon targets appeared to score an initial public relations success, being widely interpreted as a signal that the EU was taking economic reform seriously. (Even then, however, it was noted that this might damage the credibility of similar exercises were the targets to be missed by a wide margin.) Two clear advantages of the Lisbon strategy,

and especially the employment rate targets, are often overlooked in these discussions. First, the commitment to raising employment rates (i.e. raising labour force participation as well as reducing unemployment) represents a clear rejection of an idea that has been one of the great weaknesses of European employment policy in recent decades, namely that high unemployment can be cured by discouraging labour supply. If this seems obvious today, it is not so long ago in some countries that married women were discouraged from working, while older workers were actively encouraged to quit the labour market through early retirement schemes, partly in response to high unemployment. Even more recently, governments in some EU Member States were entertaining a similar notion – that