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Europe, U.S. share same productivity, wage disparity

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By James McCusker
The political debate in the presidential campaign highlights two very different views about the economies of the United States and Europe.
This explains why the campaign rhetoric stating that, "In a few years we're going to look just like Europe" is an appealing prospect to some and an appalling one to others.
The "European economy" is not a total reality, of course, and Europe is still a collection of independent countries that are unified for some things but still very possessive about their prerogatives. Despite their differences, however, European countries share some key structural characteristics that shape their economies.
The biggest structural difference is the role of government, not only as an economic control mechanism but also as a guarantor of income during and after working life.
Since they are democracies where government control reflects the collective will of the people, many, including some in the U.S., envy the economic stability and prosperity, which the European model has provided over the past half-century.
Europe's stability and prosperity are both threatened now, of course, by the financial stresses that caused the near collapse of Greece and are spreading anxiety and doubt throughout the European Community.
There is little question that the weaker economies of the community, currently referred to in financial markets as the PIGS -- Portugal, Italy, Greece, and Spain -- are collapsing of their own weight. The rates of economic growth in these countries will simply not support the government-underwritten life styles, which are an integral part of the European economic structure.
In Europe as a whole, what is especially worrisome is the possibility that the same economic structure that provides stability may also inhibit the rate of economic growth it needs to sustain itself.
This worry raises an interesting question that affects politics as well as economics: If the structural aspects of the European economic model were so flawed, why did it take so long to fail?
The economic reasons include Europe's ability to avoid some social costs through its dependency on America's defense systems and investments in health care technologies such as cost-saving pharmaceuticals and medical technology. Europe also benefitted from the American commitment to global free trade, while its formidable bureaucracy softened and delayed the impact on its own domestic markets and producers.
The distribution of social costs is not a matter of blame, accusation or hard feelings. The U.S. economy absorbed these costs because we believed they were in our best interest, and most of us wouldn't have it any other way, but it does explain why European countries took so long to realize that they had moved outside the sustainability model.
When it comes to taking a long time to recognize a problem, we've done a bit of that ourselves in our own country, of course. And, just as in Europe, the root causes of our economic problems are embedded in structural changes that we never bothered to address.
The Economic Policy Institute in Washington, D.C., has put together a dramatic graphic showing the history of one of those unaddressed structural problems: linking productivity and wage compensation.
The link between productivity and wages had been an established part of economic theory for decades and up until the 1960s the two moved together like a winning "Dancing With The Stars" routine.
In the mid-1960s, though, we saw the first hint of trouble in the partnership. And in 1972 the two parted company. In the decades that followed, productivity soared and never looked back. Wage compensation languished without gain.
There are technical issues with the data, of course; there always are in economics. Productivity statistics are notoriously soft, especially in the service sector, which now makes up so much of our economy.
But you don't have to be an economist to see the story that the data is revealing: Something happened to the U.S. economy in the 1970s. It changed, it wasn't looking back, and it was a problem.
There are many reasons for the structural changes and the broken link between wages and productivity. Manufacturing became less dominant in the economy each successive year as service sector took over. Union membership declined steadily, only partly offset as teachers and other government service workers were organized into collective bargaining units. The workplace and the job market changed from the combined forces of technology, educational requirements and population growth from domestic and international sources.
Our country has some of the same structural elements that led Europe to its current crisis point. The American economy is still resilient, though, capable of responding to shocks and meeting challenges. If we address our structural economic problems, we can solve them in our own way and in our own time. If we don't, then shame on us.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.
Story tags » Collective BargainingWages & Pensions



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