Friday, May 14, 2010

Productivity gap between the US and OECD countries

I collected data from the OECD on GDP per hour worked in each country as a percentage of the US level. The highest level of GDP per hour was found in Luxemburg (140.4 percent of the US level), Norway (136 percent of the US level) and the Netherlands (100.4 percent of the US level). In these countries, the level of productivity is higher as the workers there work fewer hours per year than in the US, so it is no surprise that relative productivity is higher. The least-performing countries are Poland (37.9 percent of the US level), Mexico (33.6 percent of the US level), and Chile (28 percent of the US level). These countries are catching-up developed nations, so in spite of relatively high number of working hours per year their level of productivity is significantly lower.

In the long run, productivity is the only engine of economic growth and the wealth of nations. It is the only hope for less-developed and developing nations to catch the income per capita level of advanced countries. There are many obstacles to higher productivity in the labor market. First, many countries impose minimum wage laws, risking higher unemployment among less-skilled workers. Minimum wages increase labor costs and reduce overall employment. Second, the number of working hours is often restricted by trade union determination of labor contracts and entry requirements in many sectors. Third, some countries reduce labor supply incentives through higher hourly wages on extra working hours so that employers do not encourage employees to work longer hours. And fourth, high marginal tax rates discourage workers from longer work. A reduction in marginal tax rates, the abolition of minimum wages, deregulation of entry requirements and tax incentives for extra hours of work could significantly boost productivity growth and higher standards of living.

GDP per hour in OECD countries
Source: OECD (2010)

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