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An Agenda for Growth in Europe

A recent OECD study reminds us, once again, that per capita income levels are roughly 30% lower in the euro area, as well as in the three largest Continental countries – France, Germany, and Italy – that dominate its performance, than in the United States. That gap is likely to widen as Europe’s demographic profile darkens, and if productivity continues to grow more slowly than elsewhere in the industrial economies.

Why have the large European economies failed to catch up with US income levels? The bulk of the shortfall is due to less intensive use of labor: employment rates for women and for the oldest and youngest age groups are lower in the euro area than in the US, working hours are far fewer, and, least significantly, unemployment rates are higher.

Some take consolation from this, viewing it as positive that Europeans prefer leisure to work. But low levels of labor utilization are largely due to heavier income taxes and social security contributions, as well as high social benefit levels introduced at a time when the labor force was growing rapidly and the need to replace involuntary with voluntary unemployment seemed more urgent than today. These measures will need to be revisited both to increase the supply of labor and to make public finances more sustainable.

This process is already underway, particularly in Italy and France, through cuts in social security contributions for lower-paid workers, tighter conditions for drawing unemployment benefits, and tax credits for “the working poor.” Since the mid-1990’s, the relative decline in employment in these countries has, indeed, been slightly reversed.