Services and Employment: Explaining the U.S.-European Gap

Services and Employment: Explaining the U.S.-European Gap

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Services and Employment: Explaining the U.S.-European Gap by Mary Gregory

Why is Europe's employment rate almost 10 percent lower than that of the United States? This "jobs gap" has typically been blamed on the rigidity of European labor markets. But in Services and Employment, an international group of leading labor economists suggests quite a different explanation. Drawing on the findings of a two-year research project that examined data from France, Germany, the Netherlands, the United Kingdom, and the United States, these economists argue that Europe's 25 million "missing" jobs can be attributed almost entirely to its relative lack of service jobs. The jobs gap is actually a services gap. But, Services and Employment asks, why does the United States consume services at such a greater rate than Europe?

Services and Employment is the first systematic and comprehensive international comparison on the subject. Mary Gregory, Wiemer Salverda, Ronald Schettkat, and their fellow contributors consider the possible role played by differences in how certain services—particularly health care and education—are provided in Europe and the United States. They examine arguments that Americans consume more services because of their higher incomes and that American households outsource more domestic work. The contributors also ask whether differences between U.S. and European service sectors encapsulate fundamental trans-Atlantic differences in lifestyle choices.

In addition to the editors, the contributors include Victor Fuchs, William Baumol, Giovanni Russo, Adriaan Kalwij, Stephen Machin, Andrew Glyn, Joachin Möller, John Schmitt, Michel Sollogoub, Robert Gordon, and Richard Freeman.

Product Details

ISBN-13: 9780691130866
Publisher: Princeton University Press
Publication date: 07/02/2007
Edition description: New Edition
Pages: 264
Product dimensions: 6.00(w) x 9.25(h) x 0.80(d)

About the Author

Mary Gregory is Deputy Head of the Department of Economics, Fellow, and Tutor at St Hilda's College, University of Oxford. Wiemer Salverda is Director of the Amsterdam Institute for Advanced Labor Studies at the University of Amsterdam. Ronald Schettkat is Professor of Economics at the University of Wuppertal in Germany. All three have published widely on labor economics.

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Services and Employment

Princeton University Press
Copyright © 2007
Princeton University
All right reserved.

ISBN: 978-0-691-13086-6

Introduction Mary Gregory, Wiemer Salverda, and Ronald Schettkat

The "jobless growth" experienced in the United States in the economic cycle of the first years of the 21st century brought to the fore an issue that has for some time been a major focus of political concern in Europe-the "missing jobs" or "employment gap." In the early 1970s the employment rate in the European Union economies was marginally above the rate in the United States. Over the ensuing quarter-century the United States forged ahead in job creation while in Europe employment growth was at best sluggish. By the initial years of the new millennium the employment rate in the economies of the European Union averaged 65.3 percent of the population of working age, while in the United States it had risen to 74.4 percent. This gap of over nine percentage points represents around 25 million "missing jobs" in the EU. In response to this, and to the concomitant problems of higher unemployment rates, the prevalence of long-term unemployment, premature withdrawal from the labor force, and limited employment opportunities for women in many (but not all) EU countries, the EU Heads of Government at their Lisbon summit in 2000 adopted the objective of raising the employment rate across the European economies by almost ten percentage points within the following decade. If this ambitious objective is to be realized,even with some slippage beyond 2010, it is essential to gain an understanding of the factors that have given rise to the employment gap between the European Union and the United States.

There is no dearth of candidate explanations for Europe's poor employment performance. The most prominent have been those that center on labor market institutions of "social Europe" and the rigidities that they introduce: trade union power in wage bargaining, and the mandatory or conventional extension of bargaining outcomes to nonunionized workplaces; employment protection provisions; minimum wages; the generosity of unemployment benefit systems; the size of the tax wedge of payroll, income and consumption taxes between the wage cost to the employer, influencing labor demand, and the take-home pay of the worker, affecting its supply. This view, given initial impetus by the OECD's Jobs Study of unemployment in the advanced economies in the early 1990s (OECD 1994), has a natural resonance with U.S. commentators but also has support within Europe. Its influence can be seen in contemporary policy stances. In the United Kingdom the Labour government through Chancellor Gordon Brown has claimed a strong macroeconomic record in conjunction with its deregulated labor market. In the face of unemployment rates of 10 percent or above, Germany has attempted to seek major changes to its social insurance and unemployment benefit arrangements with the Hartz reforms, while France has retreated from the legislated 35-hour working week.

Even as these latter economies edge towards reform the argument on the centrality of labor market rigidities is losing its cohesion as the links between labor market institutions and employment performance are put under detailed scrutiny. The conjunction of labor market rigidities and high unemployment is increasingly accepted as involving only a minority of EU economies, albeit several of the major ones: Germany, France, Italy, and Spain. Rigidities in product and financial markets are coming under the spotlight, with restrictions to competition, innovation, and the creation of new firms all seen as inhibiting employment growth. Most tellingly, the emergence in the United States of jobless growth, more typical of European experience, is undermining the easy invocation of the job creation capability of the unregulated U.S. labor market.

The employment gap between the United States and Europe is not simply about jobs. Not only are more Americans in employment, but they work more hours per week and more weeks per year, mainly through shorter vacation entitlements and even shorter vacations actually taken. Per head of the working-age population Americans work an average of 25.1 hours each week of the year, the Germans 18.0 and the French 17.4. This implies that hours worked per person in France and Germany are around 70 percent of the U.S. level. As with the jobs gap, these differences are of recent origin. In the early 1970s hours worked per person of working age were approximately the same in the United States and Europe. Americans continue to work broadly the same hours as in 1970 but have raised their participation rate substantially. Europeans now work much shorter hours and have failed to compensate for this decline in hours by a rising participation rate. This poses the question: why does the population of the world's richest country work so much, while less wealthy continental Europeans take leisure?

If this reflects social and cultural attitudes between the two sides of the Atlantic, why has this divergence emerged so dramatically since the early seventies? Frank (1999) argues in Luxury Fever that cultural attitudes are themselves shaped by the economic context of national life. The consumption patterns of the American income elite, whose incomes have been rising substantially in recent decades, stimulate consumption by less well-off Americans. In a book that has received widespread attention Warren and Tyagi (2003) make the argument that access to a public infrastructure that is increasingly diverging in quality, especially in the quality of schools, is pushing Americans into a spending race. To gain access to good schools, often located in the suburbs, households now require two incomes in order to be able to meet the higher housing and transport costs involved. As a result of these spending pressures, they argue, double-income families are in real terms no better off.

In a provocative recent contribution American Nobel laureate Prescott (2004) claims that "virtually all the large differences between the U.S. labor supply and those of Germany and France are due to differences in tax systems," particularly the higher income tax rates in Europe. This is a striking claim, as he acknowledges he had expected the major influences to be institutional constraints on the operation of labor markets and the nature of the unemployment benefit system.

Prescott's diagnosis has come under vigorous challenge from Alesina, Glaeser, and Sacerdote (2005), who also reject any appeal to deep cultural differences between a European approach to leisure and the workaholism of the United States. Instead they revert to the theme of labor market institutions, but with a new twist. Noting the sustained role of collective bargaining in continental Europe over the relevant time frame, they focus on the commitment by European labor unions to a policy of "work less, work all" in support of employment. Their argument is that, while this has failed to increase employment overall, it may have had a society-wide influence on leisure patterns through a "social multiplier" where the value of leisure is enhanced as more people participate. Alesina, Glaeser, and Sacerdote then raise the question whether union policies and regulations to which they have led, such as legally mandated holidays, are suboptimal in distorting labor supply decisions. Or are they in fact welfare-improving for the European countries, as Blanchard (2004) argues? General reductions in working hours achieved through collective bargaining may solve the coordination problem, allowing everyone to enjoy a lower-hours equilibrium than a competitive individualistic market would sustain (Schelling 1975).

The United States-Europe comparison can be taken a step further in a way that places the performance of the European economies in a more favorable light. Productivity growth has been much faster in Europe than in the United States over the last 30 years, such that productivity in Europe is now converging on the U.S. level. Since 1970 GDP per hour worked in the EU has risen from 65 to over 90 percent of its level in the United States, and in France it has even exceeded it in several recent years. This has occurred over a period in which the gap in GDP per head has remained virtually constant, with the European economies at 70 percent of the U.S. level. Just how dramatic these changes have been is shown in figure I.1, where the gap in GDP per head is decomposed among productivity per hour worked, mean hours of work per worker, the share of the working-age population in work (the employment rate), and the share of the working-age population in the total population.

Until the mid-1970s the United States was the clear productivity leader with the EU countries partly compensating for the effect of their lower productivity on GDP per head through a higher employment rate and longer working hours. From the mid-1970s there was significant reversal in both these dimensions. U.S. labor input increased markedly through both the employment rate and hours of work, while in Europe employment rates remained stagnant and working hours fell sharply; these combined movements reversed the negative U.S. balance in labor input. At the same time the huge initial productivity lead of the United States was substantially eroded. By the 1990s the U.S. advantage in per capita income was being maintained largely through higher labor input supplementing its much reduced superiority in productivity. The later years of the 1990s saw a partial reversal of this picture, sustained into the 2000s. Productivity growth in the United States recovered to rates last seen in the 1960s. This resurgence has, however, slowed down the "great American jobs machine," such that the U.S. growth pattern begins to appear to parallel European experience (see Gordon, this volume; Schettkat 2004). In the succinct summary given by Blanchard (2004) the main difference in economic performance over the past 30 years is that Europe has used its higher rate of productivity growth to increase leisure as well as income, while the United States has forgone additional leisure in favor exclusively of higher income.

The most direct route to higher income is the two-earner household, with high female labor market participation. The share of two-earner couples is some ten percentage points higher in the United States (and the United Kingdom) than in other European countries, and the shortfall in female employment in Europe is the largest single source of the U.S.EU jobs gap (Salverda, Bazen, and Gregory 2001). Two-earner households and long-hours workers buy from the market goods and services that, at lower employment rates, would be provided within the household: child care and elder care, house maintenance and cleaning, ready meals and meals outside the home, valeting services for the income-rich and time-poor. This perspective has been further developed by Freeman and Schettkat (2005), who note that hours spent in market work have been declining for men while they have increased for women, especially in the United States, with the major difference in time spent in market work occurring among women in the core age group 25-54. In the 1990s overall working hours were remarkably similar for American and European women. However, the average American woman was allocating 50 percent of her working hours to the market and 50 percent to the household, while her European counterpart was spending two-thirds of her working hours on home production and only one-third in the market. This substitution of home production by market purchases of goods and services, a development that has been labeled marketization, has proceeded further in the United States than Europe. As Freeman and Schettkat further argue, this difference in marketization and the allocation of working time sustains a higher level of market demand, and one that comprises a different mix of purchases, with a particular orientation towards services (see also Freeman, this volume).

This insight on the role of marketization is a fruitful starting point for an alternative approach to the U.S.-EU employment gap, through demand differences. A striking feature of United States-Europe comparisons is that the gap in demand per head of population is considerably greater than the income gap, and has been widening over recent years as the employment gap has become established. A further, frequently neglected, fact is that the transatlantic employment gap is highly skewed, concentrated almost entirely in certain services. Although the industrialized economies are now all "service economies," this description applies with particular force to the United States. The share of services in U.S. final demand is around ten percentage points higher than in the European economies. While the shift of output and employment towards services continues everywhere, this "services gap" shows no sign of diminishing.

Two well-known explanations have been put forward for the increasing role of services in a modern economy. The "hierarchy of needs" postulates a shift into the consumption of services as income rises. More precisely, Fuchs (1980) has shown that the share of services in overall employment follows a logistic curve against income per capita, a relationship that continues to hold. Baumol's (1967) "cost disease," on the other hand, suggests that important areas of service provision are technologically stagnant and therefore experience rising relative prices, resulting in larger shares of expenditure and employment being concentrated in services. Both these approaches are directed to explaining the rising share of services within an economy over time. Our focus is the international comparative one. Why is the role of the service sector so much larger in the United States? In particular, how far do differences in levels and patterns of demand, including the marketization of household production, explain the United States-Europe differences in employment?

This major research agenda was addressed in the international project Demand Patterns and Employment Growth: Consumption and Services in France, Germany, the Netherlands, Spain, the United Kingdom and the United States (abbreviated DEMPATEM). The objective of the project was to examine how far differences in demand patterns, particularly for services by households, could account for the employment gap between the United States and these various EU economies. The analysis spans both the level and the structure of demand at the macroeconomic level and its detailed composition at the household level. To do this effectively required the assembly of a multinational research team to prepare comparable micro-level data on the expenditure patterns and characteristics of households, and on employment. The research program was constructed to be an integrated whole, while representing the range of European economic models and experiences. Together the five selected economies comprise 70 percent of the population of the EU-15. Germany and France are the major economies of the continental EU, and key representatives of the European "social model" and its current employment challenges. The United Kingdom and the Netherlands feature considerable success in employment growth, and dimensions of labor market flexibility, particularly in the substantial role of part-time work. Spain represents the new, fast-growing economies in the west and southern regions; it has its own approach to the employment problem through fixed-term contracts. The main economies not represented are the Scandinavian group, whose socioeconomic model is sui generis and, while widely respected, is not attracting imitators. The United States is taken as the benchmark throughout.


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Table of Contents

Preface vii
Contributors ix
Introduction by Mary Gregory, Wiemer Salverda, and Ronald Schettkat 1
Chapter 1: The U.S.-European Gap in Service Employment and Demand: The Research Agenda by Wiemer Salverda and Ronald Schettkat 15
Chapter 2: Reflections on the Rise of Service Sector Employment by Victor R. Fuchs 42
Chapter 3: On Mechanisms Underlying the Growing Share of Service Employment in the Industrialized Economies by William J. Baumol 63
Chapter 4: Do Demand Differences Cause the U.S.-European Employment Gap? by Mary Gregory and Giovanni Russo 81
Chapter 5: Comparative Service Consumption in Six Countries by Adriaan S. Kalwij and Stephen Machin with Laura Blow, Marijke van Deelen, François Gardes, Maria-José Luengo-Prado, Javier Ruiz-Castillo, John Schmitt, and Christophe Starzec 109
Chapter 6: Employment Differences in Distribution: Wages, Productivity, and Demand by Andrew Glyn, Joachim Möller, Wiemer Salverda, John Schmitt, and Michel Sollogoub 141
Chapter 7: Why Was Europe Left at the Station When America's Productivity Locomotive Departed? by Robert J. Gordon 176
Chapter 8: Can Marketization of Household Production Explain the Jobs Gap Puzzle? by Richard B. Freeman 198
Chapter 9: Service Included? Services and the U.S.-European Employment Gap by Mary Gregory, Wiemer Salverda, and Ronald Schettkat 217
Bibliography 231
List of DEMPATEM Working Papers 241
Index 243

What People are Saying About This

Thorvaldur Gylfason

This excellent book deals with an important and interesting topic—the employment gap between Europe and the United States. It provides a broad and balanced analysis of the labor market situation in Europe and the United States by bringing to light interesting features of the service industry that economists have tended to overlook.
Thorvaldur Gylfason, University of Iceland

Catherine Guillemineau

Services and Employment is a collection of brilliant, seminal papers and innovative research.
Catherine Guillemineau, The Conference Board

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