Productivity Growth Rates in Europe and the USA: A Tale of Convergence in the 21st Century

Abstract: In mid 90’s, productivity growth rate started to accelerate in the USA. The sources of this resurgence were the IT-producing industry and the IT-using market services. Meanwhile, Europe was still suffering from the low level of productivity growth rates. This fact leads to pessimistic assessments about the economic future of Europe. However, this paper uncovers that productivity growth rate started to accelerate after 2000 in the EU-15ex which consists of Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Spain and United Kingdom. In fact, it is hard to realize the acceleration in the productivity growth rate in early 2000’s because of the low level of productivity growth rate in this period. However, the productivity growth rate of the EU-15ex reached to the US productivity growth rate in mid 2000’s. The major source of this convergence is the IT-using market services. In addition, acceleration of the productivity growth rate of IT-producing industry has continued in the EU-15ex after 2000. These evidences lead to the conclusion that the resurgence in productivity growth rate of the EU-15ex has the similar recipe as in the case of the USA. This paper also tests empirically the factors behind the productivity improvements that are suggested by the convergence approach of neo-Schumpeterian Growth Model. Accordingly, R&D in business enterprises and high human capital labor compensation are used as the explanatory variables. The stepwise Engle-Granger co-integration test results with the finding of the co-integration relation between TFP level, R&D spending of business enterprises and high human capital labor compensation for the EU-15ex. In this respect, I conclude that these three series are linked to form long-run equilibrium relationship in the period 1981-2007.