Productivity and competitiveness

Last Updated on Thursday, 14 March, 2024 at 9:48 am by Andre Camilleri

A recent Financial Times article, published on 9 March highlighted that the US has widened its productivity lead over Europe.

The latest data indicates that while eurozone productivity fell by 1.2% in Q4 2023 from a year earlier, in the US it rose 2.6% in the same period. In conclusion, labour productivity growth in the US has been more than double that of the eurozone and UK in the past two decades. Why is this? Many factors.

The US population is younger, growing more rapidly and working longer hours. All these factors are leading to greater workforce challenges in Europe than anywhere else. However, these factors only explain a part of the difference in productivity. A big part of the output gap is because people in the US also produce more for each hour that they work. In essence, output per hour worked, a standard measure of labour productivity has grown more than 6% in the US business sector since 2019 while in the eurozone and UK, there was a growth of around 1% over the same period.

There are also other reasons. When comparing the US to Europe, one sees that Europe has suffered a much bigger rise in energy costs due to the Russia-Ukraine war, than the US, while the fiscal policy response to all shocks from the pandemic onwards was fragmented in Europe and not so in the US. All these things add up.

Whilst Europe has various priorities on the social and environmental fronts, I sincerely believe that one of its top priorities today is to have all priorities based on its top priority towards improving productive output and hence its competitiveness. Which is why investing heavily on the digital front in Europe, like various US based industries have done, is now essential. Hopefully, the Mario Draghi EU report on how to boost EU’s competitiveness will indicate the great need to boost investments in this direction. Besides investments, a change in mentality is also needed. Rather than hiring more employees to fill gaps, Europe need to automate and digitalise faster to make up for labour force scarcities.

And where does Malta stand in all this? As shown below from the Eurostat based Labour Productivity per person employed statistic, our productivity stood below the Euro Average level in 2012. 10 years later, Malta’s labour productivity is basically still in the same position, when compared to our European counterparts.  Our productivity level is still below the Euro area average. This is so since much of our economic growth was not being delivered by increasing productivity, but by having more persons join our economy and labour market. We need to reverse this trend is we are to deliver sustainable economic growth as expanding our infrastructure comes at a huge costs and we cannot keep doing this indefinitely.

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