Commentary: The Downside Of Higher Productivity

A small jump may inspire complacency -- and slow the push for labor reform

At last, some good economic news for Europe. Labor productivity, the amount of goods produced per hour of work, rose 1.3% in 2004 for the 15 countries that form the core of the European Union, according to the New York-based Conference Board, a group sponsored by industry that tracks world economic cycles. That's a notable improvement on 2003, when productivity rose a meager 0.9%.

What prompted the jump? Experts are still dissecting the data, but some posit that last year's rate may be partly a payoff for the greater flexibility by European workers. By showing more willingness to tailor work hours to meet demand and accept changes in work rules, some unions have allowed companies to make better use of capacity and more quickly deploy labor-saving technology.

But dig deeper and you'll quickly learn there's not much to cheer about. To begin with, the 2004 productivity growth figure still lags behind the 1.9% that Europe logged on average in the second half of the 1990s. And it's way behind the 3.1% increase the U.S. posted last year. More important, economists say Europe needs productivity growth above 2% to significantly reduce unemployment, which is stuck at 8.9% in the euro zone. "There is a tremendous amount that still needs to be done," says Horst Siebert, a professor of economics at the Bologna campus of Johns Hopkins University and former member of Germany's Council of Economic Advisors.

The productivity jump, in fact, may be high enough to renew European leaders' complacency but too low to change the Continent's sluggish dynamic. After fiddling with labor rules, the leaders of France, Germany, and Italy may figure that's all they can afford to do, given the stiff resistance that even minor changes in work rules triggered.

That would be a mistake. Just look at this example of what companies go through -- even at a time when labor is showing a little more flexibility. The bottled-water unit of Swiss food giant Nestlé says that its 4,800 French employees produce about the same output as its 1,800 employees in Italy, where San Pellegrino is bottled. To remedy this, Nestlé last year proposed an early retirement plan for 1,047 French employees. But under French labor law, any such plan has to be approved by unions. In this case, there were three unions involved. Two agreed to the plan, but the leftist Confédération Générale du Travail said no, which blocked the whole thing. Nestlé threatened to put Perrier up for sale. Finally last September, after then-Finance Minister Nicolas Sarkozy intervened to put pressure on the CGT, the union agreed to drop its opposition. Goal achieved, but at a tremendous cost.

Europe's thicket of regulations, such as restrictions on shopping hours, are another big barrier to productivity growth. They dampen competition and discourage investments in new technology. Europe also needs to attack some of the other, less publicized causes for its lagging performance. Productivity-enhancing technology is the result of innovative minds, but in Germany, spots at most institutions of higher education are still allocated by a government bureaucracy. The German government has launched a program to create "elite" universities that can compete with the likes of Oxford University and Massachusetts Institute of Technology, but German institutions won't be world-class in fields such as business education until students have to compete for the best places. Progress in that direction has been much too slow.

Too bad, because the Conference Board's report shows that Western Europeans need only look to the East to see how fast their economies could grow if they were unshackled. Productivity among the 10 mostly Eastern European countries that joined the EU last May is growing at a nice clip, reaching 4.4% in 2004. The East has more flexible workers than their Western cousins, and the region is benefiting from massive investment in plants and equipment than Western Europe. Eastern Europe has an advantage, since it is less developed. But instead of trying to copy the best practices of the East, many leaders in Western Europe are crying foul. That may be good politics -- but it's bad economics.

By Jack Ewing with Carol Matlack in Paris

    Before it's here, it's on the Bloomberg Terminal.