NCPA - National Center for Policy Analysis


January 16, 2006

In the United States, productivity is on the rise with growth output per hour in the third quarter of 2005 equaling 5.4 percent; in fact, output has grown at an average annual rate of nearly 3.5 percent over the last three years. So why hasn't Europe experienced the same surge in growth, asks Hal Varian, professor of business, economics and information management at the University of California, Berkeley.

Information technology (IT) might be the answer; U.S. productivity statistics show that those industries that make and use IT have accounted for the bulk of the growth, with other industries showing little change. However, the story is quite different in Europe; productivity growth is static even though Europe has the same access to IT as the United States, at more or less the same prices, says Varian.

According to a London School of Economics (LSE) study of 7,500 establishments in Britain, American companies just make better use of IT than European companies:

  • In terms of value added per worker, American multinational corporations were 23 percent more productive than the average in Britain.
  • Non-American multinationals were about 16 percent more productive than the average, while British companies were about 11 percent less productive than average.
  • British-based American companies use a whopping 40 percent more IT capital per worker than the average company, and they use it more efficiently.
  • The biggest returns for American companies in Britain were in wholesale and retail trade -- the same industries that have been so productive in the United States.

Furthermore, the main difference in effective use of IT seems to be managerial practices; American companies are more likely than European ones to adopt practices like merit-based promotion and pay, lean manufacturing techniques, performance management and employee autonomy, says Varian.

Source: Hal R. Varian, "American Companies Show an Edge in Putting Information to Work," New York Times, January 12, 2006; based upon: Nick Bloom, Raffaella Sadun and John Van Reenen, "Information and Communication Technologies (ICT) and economic performance," London School of Economics, October 2005.

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