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Comparing European and U.S. Living Standards

Bernard Wasow
The Century Foundation, 6/21/04

A number of reports recently have focused on the income gap between Europe and the United States. To some, the persistently lower GDP per capita of Europe underlines the failure of European polices. But a closer look suggests that perhaps it is we who should envy the Europeans.

There is triumphalism in the Wall Street Journal's editorial of June 18 about "a growing split between the U.S. and Europe." The WSJ draws on a recent report from the Swedish think tank Timbro that notes the much lower level of income per capita in Europe than in the United States. As the report frames it, average income in most European countries place them well down among the states of the United States: Belgium is comparable to Alabama, Germany to Arkansas, and Spain is poorer than Mississippi. The WSJ attributes Europe's backwardness to its choice of "the welfare state road to decline."

The pieces do not fit quite as neatly in the Economist's
June 19th comparison of Europe and America. First, if we exclude Germany
(the 800 pound laggard in Europe) GDP per person grew at essentially the same
rate in Europe and the United States between 1994 and 2003. Employment grew
only a hair slower in Europe, and productivity per worker hour grew slightly
faster in Europe. Germany aside, aggregate growth in Europe and the United States
over the last decade has been essentially equal.

Still, European income per capita is only about 70 percent of the U.S. average.
But here too, there is an important wrinkle. As discussed
recently by Harvard economist Olivier Blanchard, income is lower in Europe
not because workers are less productive - output per worker hour in Europe and
the United States are almost the same - but because Europeans work fewer hours.
This is not due primarily to higher unemployment or lower labor market participation,
but to a shorter work-week, longer vacations, and earlier retirement. Altogether,
Americans work 40 percent more hours over their lives than Europeans.

Are these long vacations and early retirement choices a response to high tax
rates and the incentives built into public pensions? Some think so, including
Edward Prescott in a
study at the Federal Reserve Bank of Minneapolis. But Blanchard, looking
at the choice made in various European countries and the tax/pension systems
there, finds almost no support for the idea that workers take longer vacations
because tax rates are higher in Europe.

Between 1970 and 2000, GDP per person rose by 64% in the United States and
by 60% in France. In America, this came about because productivity per worker
rose by 38% and hours worked per worker rose by 26%. In France, it came about
because productivity rose by 83% while hours worked fell by 23%.

Where did the quality of life increase more? Maybe you should take your next
hurried vacation in France, to find out.