What explains the differences in income and labour utilisation and drives labour economic growth in Europe? A GDP accounting perspective

The paper decomposes GDP both in terms of level per capita and growth rate, so as to identify the sources of income differences and of economic growth for all EU27 member states. This accounting approach has multiple advantages, although a number of substantial caveats should be borne in mind when interpreting the results. In particular, the detailed accounting approach helps distinguish exogenous from policy-influenced growth drivers. The gap in per capita GDP across EU Member States is wide. The combination of lower per-hour productivity and lower labour utilisation (i.e. hours worked per capita) is the cause of relatively low per capita GDP in euro area and EU15 countries, while weak productivity remains the main concern in the new member states. GDP growth rate has been broken down into 12 items, including an indicator of labour quality, based upon the
composition of employment by educational attainment. Over the five years following the launch of Lisbon strategy (2001-2006), labour productivity growth and labour input growth respectively contributed to around two thirds and one third of the average economic growth of almost 2% in the EU15. In contrast, the strong economic growth in the new member states, standing at around 4% on average, was essentially explained by labour productivity growth.

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