John Rapley
BACK IN the 1990s, when the U.S. economy was booming as Europe remained moribund, American commentators delighted in heaping scorn on the European way. With all its labour laws and generous welfare provisions, Europe's approach lacked the freedom that supposedly characterised the U.S. model. As a result, its inflexibility made it impossible for Europe to generate employment at the rate the U.S. was doing.
Today, with Europe slowly rebounding as the U.S. confronts the risk of stagflation, the European way of coupling a generous state to the market economy is coming in for a second look. But quite apart from the fact that European capitalism now appears to be coming back into vogue, economists have started suggesting that the differences between the US and Europe may not be as great as once seen.
TOO KIND TO WORKERS
At the heart of the argument for U.S. superiority is the belief that European countries are too kind to their workers. By raising their wages, mandating long holidays, and making it hard for employers to fire them, European governments are said to encourage laziness. They are also charged with discouraging employment, since the heavy burden involved in taking on workers deters companies from responding to upturns with new hiring.
In short, low productivity means low profits. Low profits amount to low investment. Low investment, coupled with high unemployment, produces sluggish growth. All in all, stifling government has been said to be a hindrance to European prosperity.
However, in a noted paper put out last year by the National Bureau of Economic Research in the U.S., three economists exposed the flaws in this argument. They pointed out that European productivity has actually been good. The difference between the U.S. and Europe, they suggested, lay not in one model being more efficient than the other; but in how the two models distributed the
productivity gains.
In the U.S., rising productivity was consumed in the form of higher wages and more jobs. In Europe, by contrast, it was said that rising productivity was consumed in the form of more leisure time. When the Americans could produce more with less, they took the gains in their pay packets. But when the Europeans similarly became more efficient, they preferred to take the gains in the form of spare time hence long holidays and a more relaxed workplace.
CULTURAL DIFFERENCES
Much is made of the cultural differences that separate Americans and Europeans. It is often said that the Europeans have a joie de vivre, and the Americans a love of money. But the researchers dismissed such cultural arguments. They pointed out that not long ago, Europeans in fact worked longer hours than Americans. Rather than a cultural predilection to leisure, the authors of the paper suggested that higher rates of unionisation in Europe explained the difference.
This echoes other recent research that says that the presence of a generous welfare state owes little to cultural attributes. Were that the case, one would hardly expect Sweden's Lutheran culture, with its emphasis on self-reliance, to have produced what many consider the world's most generous welfare state. Sweden's powerful unions seem the key. It is not that Sweden does not have a culture which values its welfare state. It is rather that that culture is a consequence rather than a cause of that political arrangement.
Unions defend their existing members' interests, not those of prospective members. Given the choice between more leisure time or more jobs for the unemployed, it follows that unions will tend to opt for the former outcome.
The economy need not be less efficient. It just distributes its gains in a different manner.
John Rapley is a senior lecturer in the Department of Government, UWI, Mona.
