US-Europe Differences In Technology-Driven Growth: Quantifying the Role of Education* 1 (original) (raw)
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US-Europe Differences in Technology Adoption and Growth The Role of Education and Other Policies
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European economic growth has been weak, compared to the US, since the 80s. In previous work (Krueger and Kumar (2003)), we argued that the European focus on specialized, vocational education might have been effective during the 60s and 70s, but resulted in a growth gap relative to the US during the subsequent information age, when new technologies emerged more rapidly. In this paper, we extend this framework to assess the importance of education policy, when compared to labor market rigidity and product market regulation, which have also been suggested as reasons for US-Europe differences. Households decide between acquiring general education, which allows them to work in high-tech firms, and less costly skill-specific education, which is of value only to lowtech firms that use established production methods. High-tech firms draw a workforcespecific productivity for the new technology, and decide on whether to proceed with production and pay a portion of profits toward regulation costs, or fire the workers at a cost, and redraw a new productivity-workforce combination. Analytical characterization of the balanced growth equilibrium shows that lower firing or regulation cost increases expected growth, but causes the adopting firm to set a higher productivity threshold before it proceeds with production. A higher subsidy for general education can increase expected growth, but reduces the productivity threshold. An increased rate of technology availability can increase the gap in the growth rates of economies that differ in their policies. A "decomposition" exercise using a calibrated version of our model assigns a major role to education policy in explaining US-Europe growth differences.
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Over the past decade much has been published on the contribution of information and communication technology (ICT) to economic growth. In an attempt to find parallel historical evidence, several scholars have attempted to review the contribution of other general purpose technologies (notably steam and electricity) to output and productivity growth. Most of these contributions have had a national focus on the United States and for a limited number of European countries (for example, Finland, Sweden, The Netherlands and the United Kingdom).
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This study is about differences in unemployment rate by educational attainment between the US and Europe over the past three decades. Apart from usual explanatory variables, like wage differentials between educational groups in the two regions, specific attention will be given to complementarities between capital and skilled labour. Increasing capital stock raises skilled wages more than unskilled wages, i.e. raises demand for skilled workers and hence leads to a relative fall in unemployment among high skilled. We find that this skilled biased technology effect is larger in the US than in Europe. European institutions favour wage equality but these also imply less incentives to migrate to higher education classes. This has a depressing effect on skilled labour supply. This means there is less mobility in the European labour market compared to the US, not just from a spatial but also from an educational perspective.
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European economic growth: The impact of new technologies
2001
Volume 6 No 1 2001 10 EIB Papers to make a significant contribution to economic growth over the medium-term, though only when a certain number of conditions are met. Thus, we turn our attention to Europe and ask where the continent stands in the adoption of these technologies. Section 4 addresses this issue. In general, we find a number of causes for concern. While there are certainly some market segments where European companies perform well, it seems unlikely that EU ICT production will generate the same kind of contribution to overall growth as that seen in the US. For the economy as a whole there is also a question of the optimal structure of investment. Europe is investing relatively more in telecoms than the US, but is spending substantially less on information technology (IT). However, talking of Europe as one economic mass hides large differences between countries, some of which seem to have as "new" economies as the US. While large regional differences also exist within the US, we believe this topic merits particular reflection in the case of EU, not least because differences among EU regions are largely addressed via transfers of one form or another to support investment-including ICT (1). Section 5 addresses the question of what ICT means for the geographical distribution of economic activity. Will we see the "death of distance" or highly concentrated clusters of economic activity? Unequal performance within Europe, and between Europe and the US is also due to a number of institutional factors that influence the rate of innovation in an economy and the extent to which it can exploit new ideas to the fullest. Section 6 briefly explores some of these issues, including computer-related skills, the functioning of labour markets, and the financing of innovative start-up companies. Finally, section 7 concludes with a summary the main lessons we have learnt from this exercise. 2. Macroeconomic evidence of a new economy in the United States 2.1 The growth in US labour productivity in the 1990s Let us start with a brief recap of the recent performance of the US economy. After an unspectacular recovery from recession at the beginning of the decade, the US economy gained momentum in the second half of the 1990s. Real GDP growth accelerated from 2.4% on average in 1991-95 to 3.9% in 1996-2000. While the low unemployment rate is an impressive feature of the US economy, it is nevertheless not a key element in the acceleration of US growth in recent years. Average annual employment growth did accelerate from 1.0% in 1991-95 to 1.6% in 1996-2000, but this figure remains below the averages for previous decades (2). Rather than employment growth, the key element behind higher economic growth in the second half of the 1990s is output per man-hour worked, i.e. labour productivity. In the business sector of the economy, labour productivity growth accelerated from 1.5% annually in 1991-95 to 3.3% in 1996-2000. The paper by David (this volume), gives some more detail on the evolution of GDP and labour productivity growth in the US in recent decades. 1) See Volume 5, Number 1, of the EIB Papers for more discussion of European regional development policy. 2) Average annual civilian employment growth in fact slowed from 2.4% in the 1970s, to 1.8% in the 1980s and 1.3% in the 1990s. The focus here is on the possible consequences of ICT on long-term gro w t h , rather than the many other possible dimensions of a new economy.