Economic Performance in France, Germany and the United Kingdom: 1997-2002
Metz, Robert, Riley, Rebecca, Weale, Martin, National Institute Economic Review
We assess the performance of France, Germany and the United Kingdom over the period 1997-2002. Gross and net output per hour worked are considerably lower in the UK than in France and Germany. GDP in France and the UK have grown at the same rates over the period although real national income in the UK has grown considerably faster than in France. Seen from the supply side, French growth is substantially attributable to growth in total factor productivity while in the UK factor inputs are more important. There is, nevertheless, a concern that, at the margin, UK growth may be depreciation-intensive and therefore of poor quality. Germany's growth has been slow because productive inputs have grown only slowly and its weak performance is probably structural rather than cyclical. There does seem to be room for substantial increases in labour input in both France and Germany to be achieved through reform to labour market conditions such as tax rates on low paid workers.
The past few years are generally regarded as something of a disappointment for Germany, which has experienced periods of economic stagnation while the United Kingdom and France have grown at close to their underlying trend rate. Some estimates suggest that the United Kingdom has closed the economic gap with Germany which opened up in the 1960s. Because rates of change and levels are confused in the popular mind, closure of the gap is often assumed to mean that the UK economy is now performing better than its neigbbours rather than that it is no longer performing worse.
This article reviews the underlying supply and demand factors which lie behind the performance of France, Germany and the United Kingdom. We look first at labour supply and then at capital investment with technical progress (growth of total factor productivity') a residual. We confirm that labour market performance is a key factor holding back the French and German economies.
2. Background: what is the current relative position?
In table 1 we show the economic performance of the three countries as estimated by Barnes (2004) and calculated on the basis of the OECD estimates of purchasing power parity. It should be stressed that the data on GDP/hour worked are regarded as less reliable than those on GDP per worker. In addition to Barnes' figures we show estimates of net product per worker and per hour worked. These are calculated by applying the ratio of net to gross domestic product in the year in question to Barnes' figures and then rebasing so that the UK estimates remain 100. These figures are, for the reasons given in Box A, relevant if we want to assess the capacity of the production process in each country to contribute to economic welfare.
The United Kingdom appears in a better relative position in the net figures than in the gross figures because the share of depreciation in UK GDP is lower than that in the other countries. However, there appears to be an inconsistency between depreciation patterns in UK national accounts and figures produced by OECD on an internationally comparable basis. This is discussed further in section 5. In terms of output per hour worked, both France and Germany remain substantially ahead of the United Kingdom.
There is one further point to make about Germany's performance as shown by these data. Although the performance of the German economy has undoubtedly been affected by re-unification, one might have expected that an initial worsening of the productivity position, as efficient plants in West Germany were averaged with inefficient plants in the East, would have been gradually unwound as plant and working methods in the East were modernised. In fact, over the period shown, these data suggest that the United Kingdom has been steadily reducing the productivity gap with Germany, while the gap with France has not changed much.
There are, nevertheless, substantial concerns about these data. …