The Good Life Isn't Only In AmericaAaron Bernstein
Throughout the Presidential debates, Arkansas Governor Bill Clinton hammered at President Bush by saying that U.S. wages slipped behind those of other industrialized countries during 12 years of Republican rule. Bush concedes that times have been tough since the recession began. But he insists that U.S. living standards remain far ahead of other countries'.
Until recently, economists would have agreed with the President flat out. However, a new study by the Organization for Economic Cooperation & Development (OECD) casts doubt on the conventional wisdom. Its finding: Germany and France are, respectively, only 15% and 18% behind the U.S. in gross domestic product available per capita, the traditional measure of living standards (table). They were 26% and 27% behind in the group's previous survey for the same year, 1990. These countries' productivity levels may be closer to the U.S., too, according to a new study by McKinsey & Co.
STRANGE SWINGS. These conclusions are somewhat tentative. The OECD doesn't know why its new comparisons are so different from its last ones. In fact, the U.S. Bureau of Labor Statistics says it may publish both the old and the new figures and let the public decide which to believe. McKinsey's results aren't conclusive, either, since it relied on the new OECD figures and applied some problematic assumptions of its own. Nonetheless, the studies raise serious questions about whether the U.S. is as far ahead of the pack as most economists had thought. "If you believe the new numbers, Bush is a lot less right than everyone thought and Clinton is a lot less wrong," says Arthur Neef, the head of foreign labor statistics at the BLS, which plans to issue OECD numbers in October.
Most economists agree that the OECD survey provides the best comparison of countries' living standards. The study uses something called purchasing-power parities to adjust for exchange rates. PPPs are the rates at which different currencies purchase the same basket of goods and services in all countries. The OECD derives them from surveys of consumer prices in its 24 member countries.
The OECD's latest run at the numbers doesn't look good for the U.S. Japan's GDP per capita in 1990 came out at 82% of the U.S. level, vs. 80% in the previous study. More telling, Germany has jumped to 85%, vs. 74% before, while France rose to 82% from 73%. There were several differences between the two surveys, including the method for summing up the prices of goods. However, statistical tests suggest that the changes should produce swings of only one or two percentage points. "I can't tell you why we have a different set of results this time," says David Roberts, head of the OECD's PPP program. He believes, however, that the new survey results probably are better than the old ones.
McKinsey's study contains even worse news. With the help of productivity experts such as University of Maryland economist Martin Baily, the consulting company used the new OECD survey to analyze output per worker. It followed two approaches: One estimated the average number of hours that employees in the U.S. and other countries work. McKinsey also estimated the number of full-time equivalent workers, which it did by counting part-timers as 50% of full-timers. McKinsey then used the OECD's PPP estimates to get GDP per hour worked, a standard productivity measure, as well as GDP per full-time equivalent, another efficiency measure.
McKinsey calculated productivity both ways, using the OECD's old PPP levels as well as the new ones. The result: The U.S. was only 5% more productive than France, using the full-time worker method and the new PPPs, vs. 16% ahead using the old PPP levels. It was 11% ahead of Germany, compared with 25% before. Under the hours-worked analysis, productivity was 10% higher in France than in the U.S. using the new PPPs, vs. 3% behind using the old ones. Germany came out 6% ahead, vs. 11% behind.
SERVICE SAVIOR. This is the first study to show other nations so close to the U.S. in productivity levels. Since productivity provides the ultimate source for most living-standard growth, the implication is that the trend may send the U.S. slipping even more in the future.
If there's any consoling news in all this, it may come from the rest of the McKinsey study. Its primary purpose was to explore service-sector efficiency, which is notoriously difficult to measure. After examining five industries--airlines, telecommunications, banking, retailing, and restaurants--McKinsey found that the U.S. was ahead of Germany, France, Japan, and Britain in almost every case. The conclusion: America's well-managed service industries are key to whatever lead the U.S. still retains in productivity.
The U.S. economy may be the world's wealthiest and most efficient. But these new studies, while tentative, leave much less comfort on the subject.
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