Skip to main content

Advertisement

SpringerLink
Log in

Is Slow Economic Growth the ‘New Normal’ for Europe?

  • Published:
Atlantic Economic Journal Aims and scope Submit manuscript

Abstract

This paper considers future European growth prospects in the light of a new productivity paradox, namely, the co-existence of a productivity slowdown and exciting new technologies. Several potential explanations are reviewed. It is argued that while some are unpersuasive it is too soon to be sure which carry the most weight. This has the implication that while the slowdown is real, it is not necessarily permanent. A key, hotly disputed issue is the future economic impact of technological progress on which forecasts differ dramatically. Supply-side reform could have a strong positive effect, but this is not likely to happen.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Fig. 1

Similar content being viewed by others

Notes

  1. It is fair to point out that Greenspan noted that it was not possible to rule out the alternative that there was a massive speculative bubble, but the speech makes clear that he was a true believer that it was a productivity miracle.

  2. The calculations reported in Table 6 offer two variants depending on whether distribution is classified as a great-invention sector (as Gordon does) or not. Gordon’s classification appears to be based on the assumption that TFP growth in this sector relied on spillovers from the development of motor transport which allowed supermarkets to replace corner stores. This would presumably be an upper bound and the sector would not be included in a conventional account of the inventions of the second industrial revolution.

  3. The OP gap is defined as the difference between the weighted and unweighted average of labor productivity across firms. A completely random allocation of employment across firms would imply that the AE = 0. A higher value connotes a greater level of allocative efficiency.

  4. If we consider the implications of the future computerization of employment as equivalent to an increase in the dispersion of worker productivities, then in an equilibrium search and matching labour market model, the increase in equilibrium unemployment will be greater in a setting with relatively high unemployment benefit rates and employment protection since these are labour market policies which increase the convexity of the relationship between the unemployment rate and skill. In a calibrated model, Mortensen and Pissarides (1999) estimate that a common ICT technology shock which would raise unemployment in the United States by about 0.4 percentage points during 1975–1995 would have increased unemployment by 4.8 percentage points with “European Union” labour market policies.

References

  • Aghion, P., & Howitt, P. (2006). Appropriate growth theory: A unifying framework. Journal of the European Economic Association, 4, 269–314.

    Article  Google Scholar 

  • Aghion, P., Bergeaud, A., Boppart, T., Klenow, P. J., & Li, H. (2017). Missing growth from creative destruction. Federal Reserve Bank of San Francisco Economic Research Working Paper #4. Available at: http://www.frbsf.org/economic-research/publications/working-papers/.

  • Ahmad, N., & Schreyer, P. (2016). Are GDP and productivity measures up to the challenges of the digital economy? International Productivity Monitor, 30, 4–27.

    Google Scholar 

  • Andrews, D., & Cingano, F. (2014). Public policy and resource allocation: Evidence from firms in OECD countries. Economic Policy, 78, 253–296.

    Article  Google Scholar 

  • Antolin-Diaz, J., Drechsel, T. and Petrella, I. (2017). Tracking the slowdown in long-run GDP growth, Review of Economics and Statistics, 99(2), 343–356.

  • Arntz, M., Gregory, T. and Zierahn, U. (2016). The risk of automation in OECD countries: A comparative analysis”, OECD Social, Employment and Migration Working Paper No. 189. doi:10.1787/5jlz9h56dvq7-en.

  • Bakker, G., Crafts, N. and Woltjer, P. (2015). A vision of the growth process in a technologically progressive economy: The United States, 1899–1941. University of Warwick CAGE Working Paper No 257. Available at: http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/manage/publications/257-2015_crafts.pdf.

  • Barnes, S., Bouis, R., Briard, P., Dougherty, S. and Eris, M. (2011). The GDP impact of reform: A simple simulation framework. OECD Economics Department Working Paper No. 834. doi:10.1787/5kgk9qjnhkmt-en.

  • Bartelsman, E. J. (2013). ICT, reallocation and productivity. European Economy Economic Papers No. 486.

  • Brynjolfsson, E., & McAfee, A. (2014). The second machine age. New York: Norton.

    Google Scholar 

  • Byrne, D. and Corrado, C. (2017a). ICT prices and ICT services: What do they tell us about productivity and technology? Federal Reserve Board Finance and Economics Discussion Paper No. 2017-015.

  • Byrne, D. and Corrado, C. (2017b). Accounting for innovation in consumer digital services. Paper presented to NBER conference on measuring and accounting for innovation in the 21st century: Washington DC.

  • Byrne, D. M., Oliner, S. D., & Sichel, D. E. (2013). Is the information technology revolution over? International Productivity Monitor, 25, 20–36.

    Google Scholar 

  • Byrne, D., Fernald, J. and Reinsdorf, M B. (2016). Does the United States have a productivity slowdown or a measurement problem? Brookings papers on economic activity (Spring), 109–157.

  • Caballero, R. J., Cowan, K. N., Engel, E. M., & Micco, A. M. (2013). Effective labor regulation and microeconomic flexibility. Journal of Development Economics, 101, 92–104.

    Article  Google Scholar 

  • Cette, G., & Lopez, J. (2012). ICT demand behaviour: An international comparison. Economics of Innovation and New Technology, 21, 397–410.

    Article  Google Scholar 

  • Crafts, N. (2004). Steam as a general purpose technology: A growth accounting perspective. Economic Journal, 114, 338–351.

    Article  Google Scholar 

  • Crafts, N. (2012). British relative economic decline revisited: The role of competition. Explorations in Economic History, 49, 17–29.

    Article  Google Scholar 

  • Crafts, N. and Mills, T. C. (2017). Trend TFP growth: Forecasts versus outcomes. University of Warwick CAGE Working Paper No. 329. http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/manage/publications/329-2017_crafts.pdf

  • David, P. A. (1991). Computer and dynamo: The modern productivity paradox in a not-too-distant mirror. In OECD, Technology and productivity: The challenge for economic policy (pp. 315–347). Paris: OECD.

    Google Scholar 

  • Decker, R., Haltiwanger, J., Jarmin, R. S. and Miranda, J. (2017). Declining dynamism, allocative efficiency and the productivity slowdown. Federal Reserve Board Finance and Economics Discussion Paper No. 2017-019.

  • Eggertsson, G. B. (2008). Great expectations and the end of the depression. American Economic Review, 98, 1476–1516.

    Article  Google Scholar 

  • Encaoua, D. (2009). Nature of the European technology gap: Creative destruction or industrial policy? In D. Foray (Ed.), The new economics of technology policy (pp. 281–314). Cheltenham: Edward Elgar.

    Google Scholar 

  • Feldstein, M. S. (2017). Underestimating the real growth of GDP, personal income and productivity. Journal of Economic Perspectives, 31(2), 145–164.

    Article  Google Scholar 

  • Frey, C. B., & Osborne, M. A. (2017). The future of employment: How susceptible are jobs to computerisation? Technological Forecasting and Social Change, 114, 254–280.

    Article  Google Scholar 

  • Frontier Economics (2014), Rates of return to investment in science and innovation, London.

  • Furceri, D., & Mourougane, A. (2012). The effect of financial crises on potential output: New empirical evidence from OECD countries. Journal of Macroeconomics, 34, 822–832.

    Article  Google Scholar 

  • Gordon, R. J. (2016). The rise and fall of American growth. Princeton: Princeton University Press.

    Book  Google Scholar 

  • Greenspan, A. (2000). Technology and the economy. Speech to the Economic Club of New York, January 13. http://federalreserve.gov/boarddocs/speeches/2000/200001132.htm

  • Hansen, A. H. (1939). Economic progress and declining population growth. American Economic Review, 29, 1–15.

    Google Scholar 

  • Havik, K., McMorrow, K., Orlandi, F., Planas, C., Raciborski, R., Röger, W., Rossi, A., Thum-Thysen, A. and Vandermeulen, V. (2014). The production function methodology for calculating potential growth rates and output gaps. European Economy Economic Papers No. 535.

  • Johansson, A., Heady, C., Arnold, J., Brys, B. and Vartis, L. (2008). Taxation and economic growth. OECD Economics Department Working Paper No. 620. http://doi.org/10.1787/241216205486.

  • Meltzer, A. H. (2003). A history of the Federal Reserve: Vol. 1, 1913–1951. Chicago: University of Chicago Press.

    Google Scholar 

  • Mortensen, D. T., & Pissarides, C. A. (1999). Unemployment responses to ‘skill-biased’ technology shocks: The role of labour market policy. Economic Journal, 109, 242–265.

    Article  Google Scholar 

  • Nicoletti, G. and Scarpetta, S. (2005). Regulation and economic performance: Product market reforms and productivity in the OECD. OECD Economics Department Working Paper No. 460. doi:10.1787/726517007575.

  • OECD (2012). OECD economic outlook 2012 issue 1. doi:10.1787/eco_outlook-v2012-1-en.

  • OECD (2014a). OECD economic outlook 2014 issue 1. doi:10.1787/eco_outlook-v2014-1-en.

  • OECD (2014b). Employment Protection Statistics. https://stats.oecd.org/Index.aspx?DataSetCode=EPL_C

  • OECD (2014c). Product market regulation statistics. doi:10.1787/pmr-data-en.

  • OECD (2014d). Tax-benefit models. http://www.oecd.org/els/soc/benefits-and-wages.htm

  • OECD (2016a). Education at a glance. doi:10.1787/eag-2016-en.

  • OECD (2016b). Main science and technology indicators. doi:10.1787/msti-v2016-2-en.

  • Ollivaud, P., & Turner, D. (2015). The effect of the global financial crisis on OECD potential output. OECD Journal Economic Studies, 2014(1), 41–60.

    Article  Google Scholar 

  • Ollivaud, P., Guillemette, Y. and Turner, D. (2016). “Links between weak investment and the slowdown in productivity and potential output growth across the OECD”, OECD Economics Department Working Paper No. 1304. doi:10.1787/5jlwvz0smq45-en.

  • Oulton, N., & Sebastia-Barriel, M. (2017). Effects of financial crises on productivity, capital and employment. Review of Income and Wealth, 63, S90–S112.

    Article  Google Scholar 

  • Oxford University Centre for Business Taxation (2017). CBT Database. http://www.sbs.ox.ac.uk/faculty-research/tax/publications/data

  • Reinhart, C. M., & Rogoff, K. S. (2014). Recovery from financial crises: Evidence from 100 episodes. American Economic Review: Papers and Proceedings, 104(5), 50–55.

    Article  Google Scholar 

  • Summers, L. (2014). U.S. economic prospects: Secular stagnation, hysteresis, and the zero lower bound. Business Economics, 49(2), 65–73.

    Article  Google Scholar 

  • Syverson, C. (2017). Challenges to mismeasurement explanations for the U.S. productivity slowdown. Journal of Economic Perspectives, 31(2), 165–186.

    Article  Google Scholar 

  • The Conference Board (2016), The conference board total economy database, May 2016, http://www.conference-board.org/data/economy database/

  • United States Congressional Budget Office (2016), An update to the budget and economic outlook, 2016-2026, August 2016, http://www.cbo.gov/publication/51908

Download references

Author information

Authors and Affiliations

  1. CAGE, University of Warwick, Coventry, UK

    Nicholas Crafts

Authors
  1. Nicholas Crafts
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Nicholas Crafts.

Additional information

Paper based on the Robert A. Mundell Distinguished Address, International Atlantic Economic Conference, Berlin, Germany, 22–25 March 2017

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Crafts, N. Is Slow Economic Growth the ‘New Normal’ for Europe?. Atl Econ J 45, 283–297 (2017). https://doi.org/10.1007/s11293-017-9551-9

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11293-017-9551-9

Keywords

JEL

Search

Navigation