Over the past decade there has been a steady divergence in the interests of European and US macro and labour economists. In Discussion Paper No. 1159, Research Fellow Robert Gordon argues that persistently high unemployment in Europe has held centre stage in the concerns of Europeans, and little consensus has emerged regarding the share of blame to be attributed to cyclical or structural factors, nor on the particular mix of structural factors to be held responsible. In the US, by contrast, there is near total agreement that fluctuations in unemployment have been cyclical in nature, and that the underlying `non-accelerating inflation rate of unemployment' (NAIRU) has changed little over the past two decades.

The author explores the hypothesis that the divergence of emphasis across the Atlantic is misplaced, and that the apparently separate problems of high unemployment in Europe and low productivity growth in the US may be interrelated. The main theoretical contributions of the paper are to show how a productivity-unemployment trade-off might emerge and how it might subsequently disappear as this dynamic adjustment path is set in motion. Empirically, the paper develops a new database for levels and growth rates of output per hour, capital per hour, and multifactor productivity in the G–7 nations, both for the aggregate economy and for nine sub-sectors. It is found that much of the productivity growth advantage of the four large European countries over the US is explained by convergence and by more rapid capital accumulation, and that the only significant effect of higher unemployment is to cause capital accumulation to decelerate, thus reducing the growth rate of output per hour relative to multi-factor productivity.

Is There a Trade-off between Unemployment and Productivity Growth?
Robert J Gordon

Discussion Paper No. 1159, April 1995 (HR/IM)