Politics & Policy

Lag-Luster Europe

They'll never match the U.S. without a tax cut on work.

Europeans are frustrated. They have been behind the United States economically for years and thought this was due to lack of economic integration. So they created the European Union, with a common currency and virtually free mobility of goods, capital, and labor throughout the continent. Yet Europe continues to lag.

A new report from the Bureau of Labor Statistics shows the U.S. with real gross domestic product per person in 2003 of $34,960 (in 1999 dollars). This is well above every European country. The most productive European country, Norway, has a per capita GDP of just $30,882 (converted using purchasing power parity exchange rates). The major countries of Europe are even further behind: United Kingdom ($26,039), France ($25,578), Italy ($24,894), and Germany ($24,813).

In other words, Europeans produce no more per year than Americans did 20 years ago. And they are not catching up. According to the Bank for International Settlements in Switzerland, the productivity gap between the U.S. and Europe is actually widening. In the Euro area as a whole, workers were 86 percent as productive as American workers in 1995. In 2003, this fell to 84 percent.

As a consequence, living standards are much lower in Europe than most Americans imagine. This fact is highlighted in a new study by the Swedish think tank Timbro. For example, it notes that the average poor family here has 25 percent more living space than the average European. Looking at all American households, we have about twice as much space: 1,875 square feet here versus 976.5 square feet in Europe. On average, Europeans only live about as well as those in the poorest American state, Mississippi.

Where Europeans are better off, perhaps, is in terms of leisure — they have a lot of it. According to the Union Bank of Switzerland, the typical European has two to three times as many paid days off per year as Americans. And according to Eurostat, Europeans don’t put in much of a workday, either. According to the report, the typical European only does a bit more than 5 hours of gainful work per day, with Norwegians at the low end at 4 hours, 56 minutes per day, and (surprisingly) the French at the high end at 5 hours, 44 minutes per day.

One reason for the short workday is that Europeans seem to get sick a lot more than Americans. According to a July 25 report in the New York Times, on an average day 25 percent of Norway’s workers call in sick. A 2002 study in Sweden found that the average worker there took more than 30 sick days per year. Makes you wonder just how good their health-care systems really are.

As a consequence, aggregate hours worked are much lower in Europe than in the U.S. According to a new report from the Organization for Economic Cooperation and Development in Paris, last year the average American worked 1,792 hours. By contrast, the average Frenchman worked just 1,453 hours and the average German worked only 1,446 hours. Twenty-five years ago, annual hours worked in Europe were much closer to those here.

The OECD blames the unwillingness of Europeans to work as the principal reason for the lower output per worker and their lower standard of living compared with Americans. “Research has clearly established a remarkable fact: namely, that the sizable U.S. advantage in real GDP per capita … is largely due to differences in total hours worked per capita,” the report states. It urges European governments to reform their labor policies to increase work hours, a recommendation seconded in a recent report from the International Monetary Fund.

Unfortunately, neither the OECD nor the IMF has any real explanation for why Europeans take so much leisure time. However, a new study by economist Edward Prescott of the Federal Reserve Bank of Minneapolis provides the answer. He says that Europe’s higher taxes explain almost all the difference in labor-force participation rates between Europe and here. He notes that when European tax levels were comparable to those here, work hours were similar. But as Europe’s taxes have risen, workers responded by working less.

Consequently, tax cuts in Europe would raise labor supplies, increase output, and raise the standard of living. For example, if France reduced its tax burden from 60 percent of GDP to 40 percent, the average Frenchman would be able to consume 19 percent more over his lifetime than he does now. This is a very large impact.

In short, Europeans don’t work because it just doesn’t pay to work after the government takes its cut. And because welfare benefits are so high, the cost of not working is low. Thus, when workers compare what they make after-tax with what they can make by doing nothing, the gap is very small.

– Bruce Bartlett is senior fellow for the National Center for Policy Analysis. Write to him here.


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