Employment differences in services: the role of wages, productivity and demand

The paper shows that the growing employment gap between Europe and the USA over recent decades reflected the failure of services-employment rates in Europe to converge to American levels whilst European employment rates in goods production were falling rapidly towards those of the USA. The services-employment gap is concentrated in distribution (retail and hotels and catering) and community and personal services. To explain this, attention has been focussed, first, on the role of labour market rigidities in inhibiting the growth of the low-wage services, particularly in the distribution sector as a major and private employer of low-wage labour. Detailed examination of the wages and employment in retailing suggests that wage penalties are not more important in the USA, certainly not for the low skilled and at the bottom end of the wage distribution. Instead, American retail has kept down wage costs more by the composition of its work force, e.g. part-time workers ñ but also this composition effect was surpassed by some European countries. A second explanation is sought at the more macroeconomic level. European distribution did suffer from a rapid growth in product wages and a profit squeeze back in the 1970s, but in the 1990s productivity grew considerably faster in American distribution and European product wages grew relatively slowly. Thirdly, it is shown that the much higher level of goods consumption per head of the population as compared to Europe was the dominating influencing in explaining the much higher levels of employment in American distribution. This suggests that the lower level of services employment in Europe may be more importantly explained by the economy-wide influences explaining low levels of aggregate hours worked and thus aggregate consumption rather than specific labour-market constraints on the service sector itself.