Why is Productivity Growth in the Euro Area so Sluggish?

IMF Working Paper No. WP/04/200

36 Pages Posted: 4 Nov 2004

See all articles by Marcello M. Estevão

Marcello M. Estevão

International Monetary Fund (IMF) - Western Hemisphere Department

Multiple version iconThere are 2 versions of this paper

Date Written: October 2004

Abstract

Slow productivity growth has plagued the euro area since the mid-1990s. That is particularly striking in view of the large productivity gains in the United States during the same period. This paper shows that the deceleration in labor productivity in the euro area was caused by structural changes in wage formation that have affected the relative price of labor, increased the labor intensity of growth and, thus, reduced the rate of capital deepening. Technological shocks seem to have played a minor role in explaining slower productivity growth in the euro area. In addition, 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.

Keywords: Productivity growth, structural change, capital deepening, wage moderation

JEL Classification: D24, E22, E23, E24

Suggested Citation

Estevao, Marcello M., Why is Productivity Growth in the Euro Area so Sluggish? (October 2004). IMF Working Paper No. WP/04/200, Available at SSRN: https://ssrn.com/abstract=613967 or http://dx.doi.org/10.2139/ssrn.613967

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