by Richard B. Du Boff
27 October, 2003

1. Rates of growth of the US economy: In real (price-corrected) terms, the “boom” years were 1997-2000, when the gross domestic product (GDP) expanded at the rate of 4.0 percent per year--above long-term average but hardly unusual for the upswing phase of a business cycle. The rate dropped to 0.3 percent in 2001 and 2.4 percent in 2002.
Rumor has it that on Friday (30 October) it will be announced that growth of GDP accelerated to an annual rate of 6 percent in third-quarter 2003. If so, it would mean that for the first nine months of 2003, GDP grew around 3.5 percent per year, indicating that the economy is still recovering slowly from the last recession (March 2001-November 2001). The growth in 2003 comes from a combination of tax cuts and sharp increases in military spending, and the effect of these stimuli could wear off by the end of the year.

2. Employment: The labor market is in bad shape. The dismal numbers reveal the greatest employment contraction since the 1930s, with two to three million jobs lost since 2001.
For the first time since the Second World War, the number of payroll jobs continued to fall, 22 months into recovery from a recession (the previous record, impressive in its own right, was 13 months, after the recession of 1990-1991). From March 2001, when the latest recession began, to August 2003, 3.2 million private-sector jobs disappeared--a 2.9 percent contraction; between the end of the recession in November 2001 and August 2003, the loss in private-sector jobs was 1.2 million. The total number of employees on payrolls (both private sector and public) fell from 132.6 million in March 2001 to 129.8 million in August 2003, a drop of 2.8 million; during this period there was an increase in government employment. In September 2003, private-sector payrolls increased by 72,000, but total employment grew only 57,000: state and local governments have been laying people off during most of 2003.
Payroll employment is the most important statistic for assessing the state of the labor market. It shows that not only that we are losing jobs; it also leads us to compare jobs lost with new jobs becoming available. Large number of workers who find new jobs are unlikely to receive the same wages or to get back the medical and pension benefits they had in their previous job. In other words, jobs lost are replaced by jobs of lower pay.

3. Unemployment rate: 3.8 percent of the Labor Force was out of work in April 2000 (the lowest rate since 1969); the rate rose to 4.3 percent in March 2001, then to 6.4 percent in June 2003. Currently (September 2003), it stands at 6.1 percent.
The official unemployment rate is the percentage of all workers who are unemployed, expressed as Unemployment / Labor Force. The numerator--Unemployment--is the number of people without jobs who have actively looked for work during the last four weeks. The denominator is the number of people in the Labor Force, which equals Employment + Unemployment: people who have jobs and those who are unemployed, as defined in the numerator. This measure underestimates true unemployment in two respects: First, Unemployment excludes involuntary part-time employment--people who are working part-time or split-week schedules but who would prefer full-time work. Second, it excludes “discouraged workers”--those who believe they can no longer find a job and cease looking. Anyone who quits the job search and no longer actively seeks work is classified as “not in the Labor Force” (neither Employed nor Unemployed). If these two categories were added to the ranks of the officially Unemployed, the true unemployment rate would be at least 10 percent of the Labor Force, almost certainly higher.
For example: the Labor Force (Employed + Unemployed) totalled 147,096,000 in June 2003 and 146,530,000 in August 2003--a decrease of 566,000, during which time the official unemployment rate fell from 6.4 percent to 6.1 percent. The reason for the drop in the rate is that 566,000 workers vanished (ceased looking for work).
Since the 1980s, long jobless spells and labor force withdrawal have become more important than ever before, meaning that the official unemployment rate increasingly understates true unemployment in the US. Jobless rates fell sharply in the 1990s because more prime-age males stopped looking for work and thus were not counted as unemployed. “Over the 1990s, even as unemployment was falling, time spent out of the labor force was rising . . . [and] was so large that total joblessness--which combines the unemployed with those who have withdrawn from the labor force--was as high at the business cycle peak in 2000 as it had been at the previous cyclical peak of 1989, even though the unemployment rate was roughly 2 percentage points lower. In terms of total joblessness, the often-praised boom of the 1990s really represented little in the way of employment progress for American males.”(1)
Incarceration is another comparatively large source of “hidden unemployment” in the US. In 2002, the number of people imprisoned reached 2.0 million: we’re number one! The US has 702 prisoners per 100,000 of population, well ahead of second-place Russia (665 per 100,000); the US rate is three times higher than that of Iran, four times that of Poland, five times that of Tanzania, seven times Germany’s. Adding jailed working-age men to the official US Unemployment rate would increase it by as much as 0.3 percent.

4. Hasn’t France’s economy become backward, sclerotic, and hopelessly less dynamic than the US economy? And isn’t that true for “Old Europe” as a whole?

There is a common belief, promoted by the US and its allies, that a “productivity gap” has opened up between the US and the European Union (EU) area. (Productivity is simply the ratio of output to input; the most important productivity measure for any economy or industry or company is labor productivity--how much output a worker produces in a given period.)
The data do not support the view that US productivity reigns over all. In the major European economies in recent years, real GDP per hour of labor time has equalled 85 to 100 percent of the US level or more (except for the UK and Italy where productivity remains substantially lower, and in Germany, where it was set back after reunification in 1989-1991 and would otherwise exceed the US level today).

GDP per hour worked, as percent of US level, 2001: (2)
Belgium: 107%
France: 106
Germany: 96
Italy: 84
UK: 82

In rate of growth of GDP per hour worked, all five countries grew faster than the US from 1973 to 1998; during the 1990s the results were the same except for France, whose growth rate (1.70 percent per year) was virtually the same as that of the US (1.74) (3)

Rate of growth of output per hour in manufacturing, 1979-2000, percent per year: (4)
Belgium: 3.7 %
France: 3.6
Germany: (not available)
Italy: 2.7
UK: 3.6
USA: 3.5

So it seems that French workers (like others in Europe), operating in an economy supposedly overregulated, overunionized, and strangled by welfare state disincentives, are as productive as their US counterparts.

5. Living standards--in terms of real GDP per head of population--are higher in the US.
In 2001, per capita income in France was 73 percent that of the US; in Belgium 81 percent, Germany 73 percent, Italy 70 percent, the UK 71 percent (5). But if GDP per person is higher in the US, it is because of higher labor utilization: American workers spend more time on the job, less in leisure; and time spent at work in the US has been rising since the 1970s. In 2000, American workers spent 1,877 hours on the job compared to 1,480 for German workers, 1,562 for French, 1,634 for Italians, and 1,708 for Britons; only in the US was the work-year longer than it was in 1979. In fact the average worker in the US now spends more time working than he or she did in 1950. (6)
Americans produce more than the French mainly because they spend more time doing it. If Europeans are “poorer” than Americans, it is not because they are less productive, but because they choose to work less.
It is also because fewer of them work: unemployment rates have been higher in the EU than in the US during most of the past twenty years, and the share of the population with jobs--the employment rate--is lower on the Continent. Higher unemployment in Europe is primarily the result of monetary and fiscal austerity imposed upon the EU in the name of “growth and stability”--the Maastricht constraints--and not “labor market rigidities” that deter EU industrialists from creating jobs. The US job market has been characterized by wage stagnation and much greater inequality of income distribution, which does appear to be related to the greater wage flexibility--downward--in the US than in Europe. If the standard of living in the EU is marred by higher rates of unemployment, the US standard of living conceals a spectacular degree of income and wealth inequality, far and away the highest of any comparable country. As German sociologist and EU Commissioner Ralf Dahrendorf stated in 1987, “I for one would probably prefer to be unemployed in Europe than be poor in America.”

Finally, all official statistics based on GDP exaggerate America’s lead in living standards. Spending by US business firms on software is counted as investment, which adds to GDP. In the EU, most countries count such software as current business expense, so it is excluded from final output and does not enter into GDP. In addition, EU economies, unlike the US, do not allow fully for gains in computer quality over time. This too understates GDP, and productivity growth, in Europe relative to the US.

The American economist Robert Gordon offers another reason why the living standards gap between the US and Europe is less than meets the eye. Americans spend larger proportions of their incomes on goods and services that do little if anything to increase their welfare. Take housing: available data suggest that the average dwelling unit, in structure and surrounding land, is at least 50 to 75 percent larger than the average European unit. It might be argued that some of the size difference enhances the welfare of the owners, but it is harder to make such a claim for other expenditures that Americans are compelled to make, on climate control, transportation, and security--steeper heating and air-conditioning bills to attain a given indoor temperature, heavier outlays on automobiles and highways to support the dispersion of the population over suburban and exurban sprawl, a significant fraction of the GDP for home and business security, not to mention the costs of keeping two million people behind bars. “Excessive American energy use and the huge wastage of constructing all those prisons” alone might wipe out half the US-Europe gap in living standards on any balance sheet of welfare and conventionally-measured GDP. (7) One might add the “lawyering” of US society compared to Europe--expenditures on legal services that also increase US GDP but add nothing to welfare (and probably subtract from it).


(1) Chinhui Juhn, K. Murphy, and R. Topel, “Current Unemployment, Historically Contemplated,” Brookings Papers on Economic Activity 1:2002.

(2) Lawrence Mishel, J. Bernstein, and H. Boushey, The State of Working America 2002/2003. Washington: Economic Policy Institute, 2003, Table 7.3.

(3) Angus Maddison, The World Economy, Paris: OECD, 2001, Table E-8

(4) US Bureau of Labor Statistics, BLS News, 31 August 2001.

(5) World Bank, World Development Report 2003, Table 1. These figures are close to those for 2000 in Statistical Abstract of the United States 2002, No. 1320.

(6) Mishel, Bernstein, and Boushey, State of Working America, Table 7.17; Maddison, The World Economy, Table E-10.

(7) R. J. Gordon, Two Centuries of Economic Growth: Europe Chasing the American Frontier. Economic History Workshop, Northwestern University, October 2002.

Richard B. Du Boff is professor Emeritus of Economy at Bryn Mawr College

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