The Employment Effects of the 'New Economy'. A Comparison of the European Union and the United States

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This paper provides an analysis of the trends in labour productivity and employment growth at industry level in the European Union and the United States during the 1990s. We analyse relationships for groups of industries, i.e. industries that produce ICT products and services, those that invest strongly in ICT, and those that make less intensive use of ICT. The main findings are that the inverse relationship between employment and productivity growth has been much more prominent in manufacturing industries than in services industries. Secondly, during the I 990s, this relationship has turned positive in many industries, in particular in ICT-producing industries and in ICT-using industries in the service sector. Finally, the employment-reducing effects of productivity growth have remained considerably stronger in Europe than in the US.

I. Introduction

The explosive growth of investment in information and communication technology (ICT) has been at the centre of the 'new economy' hyperbole. While the slowdown in GDP growth since 2000 has tempered enthusiasm for investment in ICT in Europe and the United States alike, the contribution of ICT investment to economic performance should not be assessed solely on the basis of a cyclical slowdown in investment. In fact, recent analysis suggests that the structural forces of the late 1990s are still in place, despite the slowdown in growth on both sides of the Atlantic. (1)

Despite faster GDP growth, productivity growth in most European countries has slowed down during the second half of the 1990s. For the Union as a whole, the average annual growth rate of labour productivity, measured as gross domestic product per hour worked, fell from an average growth of 2.3 per cent in 1980-95 to 1.4 per cent in 1995-2000. In contrast, productivity growth in the United States accelerated from 1.3 per cent during the 1980s and first half of the 1990s to 1.9 per cent during the second half of the decade.

The acceleration of productivity growth in the United States has been widely attributed to the rapid increase in investment in information and communication technology (ICT) (OECD 2001). Some have stressed that this growth acceleration is to a large extent due to improved productivity growth in the ICT-producing sector (Jorgenson, 2001). Others have demonstrated an increasingly productive use of ICT goods and services elsewhere in the economy (Baily, 2002; Oliner and Sichel, 2002).

While there has been much discussion of the link between productivity growth and the 'new economy' there has been much less focus on the behaviour of employment. (2) Both the United States and the European Union experienced an improvement in the employment situation during the late 1990s. During the period 1995-2000, US employment, in terms of number of workers, increased at about 2.0 per cent annually with Europe registering 1.2 per cent growth per year. For the US this represented continuation of a long-standing trend of rapid employment growth for most of the 1980s and 1990s. In contrast, in the EU it constituted a sharp increase following a decade and a half of relatively slow employment growth. During the period 1980-95, employment growth in the European Union was meagre at 0.3 per cent.

Despite the acceleration, employment growth in Europe remained lower than in the US during the second half of the 1990s. In terms of total hours worked, the gap between US and EU labour input growth was even higher than for growth in employed persons. Average hours per employee in Europe declined while those in the US even increased somewhat (McGuckin and van Ark, 2003).

Thus, compared to the previous two decades, Europe has seen an improvement in the employment situation but with a strong slowdown in productivity growth. This suggests that the growth path of the EU in the 'new economy' era has become more labour intensive than it used to be, which suggests a negative relationship between employment and productivity growth, at least at the aggregate level. …