Posted on: Monday, November 25, 2002

Productivity rate may be secret to U.S. global power

By Art Pine
Bloomberg News Service

WASHINGTON — British-born Chris Robinson said he was astonished when he took over operations in Peoria, Ill., for 4B Components Ltd., a Britain-based supplier of grain elevator parts and monitoring devices.

When a customer needed a heavy part delivered during the weekend to deal with an equipment breakdown, Robinson's warehouse manager volunteered to make the 1,600-mile round trip himself in the company pickup, without extra pay.

"I just couldn't believe it," Robinson said. "That wouldn't have happened in Europe. The U.S. is definitely a more switched-on place to get something manufactured."

Robinson's experience helps explain why U.S. productivity — hourly worker output — grew at an average 2 percent annual rate in the last half of the 1990s, according to figures from the Conference Board, an economic research group in New York. In Europe, the increase was an average 1.3 percent. Productivity growth in the United States is accelerating: it was 5.3 percent for the 12 months that ended in September.

The widening gap may enlarge the disparity in living standards between the regions and heighten American dominance of the global economy, economists and investors said.

"Europe should be concerned about it, because the U.S. will continue to widen that gap," said Bill Rutherford, who manages $20 million in investments for Rutherford Capital Management in Portland, Ore. "American workers work longer hours and work with fewer holidays. You throw in advanced technology, and it makes productivity here grow much faster."

Productivity growth is crucial to higher living standards because manufacturing more with the same number of workers enables economies to grow without a parallel acceleration in inflation. As world economies have become more linked, productivity has increased in importance for companies that compete worldwide.

Federal Reserve Chairman Alan Greenspan, who has cited productivity gains throughout his 15-year tenure for the performance of the U.S. economy, said last week that lagging business investment will improve as companies reap the benefits of greater efficiency.

In testimony to Congress following the Fed's decision to lower its benchmark rate a greater-than-expected half point, Greenspan said the increase in productivity "has not faltered."

The European Commission confronted the issue in a recent report. Productivity gains for Europe "are expected to remain low for another year in 2003," and that "puts additional strains on corporate profitability" and investment, the European Union's executive body said.

"Productivity growth remains strong in the U.S. and feeble in Europe," said Emmanuel Ferry, an economist at Exane, a Paris-based stock brokerage. "That's the main difference between the two continents."

It wasn't always that way, according to figures from the European Commission. While U.S. productivity grew an average 1.5 percent from 1961 through 1990, Europe was averaging a 3 percent rise annually and Japan posted a 5.1 percent annual gain.

That changed between 1996 and 2000, when U.S. productivity grew an average 2 percent a year, Europe's rose 1.3 percent, and Japan's 1.5 percent.

The growth left the European Union just below the United States in terms of the absolute level of productivity. Germany's productivity is 97 percent that of the United States, while France is the same, according to OECD figures. The higher taxes, greater regulation and shorter workweeks of many European countries induced European companies to buy machinery rather than hire more workers.

"Productivity in Europe is respectable because so few people actually work and that boosts the numbers," said Dirk Pilat of the OECD. "In itself, there is nothing to boast about."

The U.S. growth rate began to rise in the 1990s as the nation deregulated industries from trucking to electric power, while Europe maintained controls. U.S. companies pared their payrolls in the early 1990s, and began exploiting computer-related technology to become more efficient.