1. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-1 Productivity since 1870: Almost Catching Up is Not Enough

2. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-2 Productivity Post-1960: The Ratio Reaches 96.9% in 1995

3. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-3 Output per Capita, Europe/US: Stagnation Since 1970

4. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-4 Ratios of Ratios: The Real Clue as to What is Going On

5. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-5 A Close-up of Hours per Employee after 1960

6. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-6 Employment per Capita: U.S. Women and Teens Marched Off to Work 1965-1990

7. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-7 Summary: When Changes in H/N Matter and When They Don’t For study of long-run growth in a single nation, the growth of the standard of living (Y/N) is roughly the same as the growth of productivity (Y/H) To understand “how Europe can be so productive (high Y/H) yet so poor (low Y/N)” we need to understand the decline in Europe vs. US hours per capita (H/N)

8. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-8 Some Issues Debated in Current Research Of these causes of declining European H/N up to 1995, which were the most important? – High taxes – Generous welfare system – Employment protection regulations – High minimum wage

9. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-9 Welfare Comparisons Standard microeconomics: (welfare or “utility”) depends on market income plus leisure – People decide how much to work by comparing real wage with marginal value of leisure (= marginal disutility of work) So the true Europe vs. US welfare ratio is market income plus extra leisure, right? Only partly right

10. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-10 Why Can’t We Just Add Value of Leisure at the Market Real Wage? Europeans are adding less valuable leisure Leisure value of being unemployed is questionable – Same for early retirement Europeans shift from work to home production, not leisure Survey: People enjoy work!