Closing the gap

The US, France and Germany are all far more productive than
the UK. Keith Rodgers finds out what lessons can be learned and how we might
start to close the productivity gap

If the solution to the UK’s poor productivity lies in trying to emulate the
other major Western economies, then Michael Porter and co have got their work
cut out.

Does the answer lie in the entrepreneurial ‘hire and fire’ mentality of the
US? Perhaps the processes that historically powered the highly regulated German
economy should be applied? Or is the relative success of the French down to
higher investment in technology, or people, or both?

In short, what are the dynamics that drive productivity in the very
different economies of France, Germany and the US and how can the UK learn from

United States

Given its controversy in Europe, it is hardly surprising that the US concept
of ‘at will’ hiring gets a lot of attention. The notion that an employee can be
terminated for any reason – aside from discrimination that violates their civil
rights – does not sit comfortably with perceptions on the other side of the
Atlantic about what constitutes good people management.

For economists studying the US labour market and productivity levels,
however, the ease with which companies can dispose of employees is only a small
part of a bigger workforce dynamic.

The power of the US economy is attributed in large part to the flexibility
of its workforce and an entrepreneurial spirit that pervades the business
landscape – a spirit that is reflected in attitudes to bankruptcy, for example,
which tends to be regarded as a consequence of risk-taking, rather than a social

And regardless of what it looks like from a European perspective, the US has
actually adopted advanced human capital management practices.

Erik Brynjolfsson, professor of management and director of the e-business
centre at MIT Sloan, a top US business school, believes that investment in
computing and telecommunications technology has been a key factor in the
resurgence of the US economy since 1995. That investment has enabled
organisations to find new ways of doing work, triggering internal
reorganisations and significant changes to how companies deal with their
customers and suppliers.

Although the causal link between technology investment and productivity
improvements is hotly disputed by economists, Brynjolfsson points to data
showing that European firms ‘…invest significantly less in information
technology, and on average tend to have a less mobile labour market’.

Brynjolfsson is close to completing a study of 384 large US firms, which
bears out the kind of people management changes that tend to accompany
technology adoption. It suggests that firms with less investment in technology
tend to have a more ‘command and control’ management approach.

By contrast, technology adopters can distribute information across the
organisation more freely and have more decentralised decision-making,
empowering staff to act more autonomously.

Technology adopters also tend to have moved away from seniority and
time-based compensation in favour of performance-related remuneration, and
invest more heavily in education and training. All of these HR practices are
important factors in driving productivity.

Peter Nolan, professor of industrial relations at Leeds University and
director of the Future of Work programme for the Economic and Social Research
Council, points out that the US economy shares many features with the UK’s,
particularly in terms of deregulation. However, the US economy has historically
been able to exploit the economies of scale that derive from its huge internal

"In the US, companies have to perform at the cutting edge or they just
go under – in the UK there’s always been some possibility for
under-performing," says Nolan.


If ‘at will’ hiring is the norm in the US, compulsion is the watchword in
vast sections of the German economy. Only this month on 15 January, electronics
giant Siemens received a slap in the face from its works council when it
rejected the vast bulk of proposed redundancies at a telecoms unit, and raised
the spectre of a stream of individual lawsuits.

Long vilified by incredulous US investors, Germany’s extensive labour laws
have come under tight scrutiny as its sluggish economy is barely growing and
unemployment has climbed to nearly 10 per cent. Many believe the power of the
country’s trade unions, combined with complex legislative protection, make it
extremely difficult for companies to react quickly to changing market

Yet historically, the German model has clearly been effective. The UK has
long lagged behind in terms of prosperity – figures released by the
Organisation for Economic Co-operation and Development (OECD), for example,
show that while Germany enjoyed better GDP per head in 2000 than France and the
UK put together – all three lagged way behind the US.

In the last update of its productivity and competitiveness indicators, the
DTI acknowledged that ‘…despite inferior labour market performance, Germany
has a higher average standard of living than the UK. This is because the
workers that are employed produce more per person and per hour worked’.

This apparent contradiction between high productivity and stifling
regulation is partly explained by internal dynamics. The regulatory framework
is a combination of both legal constraints and voluntary codes, which are
hammered out between employer organisations and a powerful trade union

"German unions like change, so it [the German economy] is highly
regulated, but incredibly flexible. Organisations see new opportunities and can
exploit them, because they have the possibility of taking their employees with
them," says Nolan.

Economists also argue that the regulatory environment forces companies to
engage in more strategic HR management practices – if they can’t get rid of
staff, they have to redeploy and retrain them, which again creates internal
flexibility. In the US by contrast, as Brian Glade, vice-president of
international programmes at the Society for Human Resource Management points
out, retraining is left up to the employees themselves.

Liberal critics of the German system, however, argue that as well as being
over-regulated, it is also inefficient, with vast investment in public services
masking under-performance. And today, the problems at the heart of the German
economy are certainly severe. Unification has had a big impact, and the
productivity gap between the UK and Germany has narrowed over the past five

In its 2002 economic survey, the OECD pointed out that growth has been very
low since 2001, adding that ‘low employment growth and a high share of
structural unemployment are highlighting the need for comprehensive labour
market reform’. Not surprisingly, its prescription includes ‘a higher degree of
wage responsiveness to market conditions’, and a review of the ‘complex’
employment protection procedures.


When it first introduced a mandatory 35-hour week, France had economists and
social historians at each others’ throats. Would it, as protagonists hoped,
reduce unemployment by spreading work among a wider employee base? Would it,
reduce productivity by over-regulating the way employers manage their staff? Or
would it force companies to work more cleverly, maximising the effectiveness of
each employee and bringing more flexibility to the workforce?

If the hours that people work were directly linked to productivity, the
decision would certainly have been a foolish one. But as the legendarily
hard-working Brits will testify, hours chalked up do not automatically lead to
better productivity.

In the end, the answer was inevitably complex – especially as the move took
place amid other major economic influences such as the introduction of the
euro. On the one hand, French GDP growth held up and productivity per hour
increased – but productivity per worker stayed relatively flat.

At the same time, the increased flexibility that came with the capped time
limit has helped corporations match working patterns to fluctuating demand.

However, it has brought little in the way of competition to the French
bureaucratic machine, now estimated to employ between a quarter and a third of
the workforce. Just as teaching remains a job for life in Spain, so state
employment remains attractive to many French school-leavers.

The level of bureaucracy is a routine gripe and is singled out as a factor
in the high proportion of new business failures. Like Germany, it is difficult
to fire staff in France too, but the French government at least has gone some
way to deregulating the labour market. In 2001, the comparative fortunes of the
two countries were driven home when Germany’s unemployment rate topped France’s
for the first time in almost 50 years.

A recent report from the United States Department of Labor, meanwhile,
showed that in 2001, manufacturing output per hour in France increased
significantly at a rate that easily surpassed the US, UK and Germany, only
lagging behind the likes of Korea and Taiwan.

So while popular opinion in the UK characterises the French as less hard-working,
the reality is that per capita, their output remains higher.

There may be geo-political reasons for this – France, after all, has closer
physical ties with the rest of continental Europe, and as Nolan suggests, this
may mean that it’s better able to enjoy the economies of scale the wider market
brings. But many economists believe that the reasons for the disparity lie as
much in structural faults in the UK economy, as in the relative strengths in

Vive la difference – it’s all in the mindset

Pierre Giraudon is no stranger to the widely different dynamics of the
European and US economies. A French citizen with extensive management
experience in his own homeland, he was previously based in the US as a senior
vice-president of Carreker, a specialist consultancy focusing on improving
banking efficiency. Now, he’s back in Europe – and setting up Carreker’s first
French operation.

For Giraudon, the differences between the two business environments are
striking, rooted in very different cultural legacies. France’s history is one
of state intervention, reinforced in the immediate aftermath of the Second
World War and again during a nationalisation drive in the early 1980s.

He believes that the legendary French bureaucracy has long been a
disincentive to entrepreneurs, tying them up in administrative hassles during
the first few months of incorporation at a time when they should be focused on
making their new businesses work.

Although the pendulum has swung back over the last five years and some of
the red tape has been cut, it is still more complex to set up and do business
there than in the US. The cost of employing staff, for example, is high – for a
$100,000 (£62,000 salary, fringe benefits typically add another $50,000
(£31,000) to the wage bill. And laying staff off is a complex process.
Companies typically have to argue their case to the regulatory authorities, the
unions, and in high-profile companies, the government – and in many cases, they
are forced to change their plans as a result.

As well as affecting organisations’ ability to change rapidly, those factors
make many employers think twice before they hire.

On the positive side, Giraudon’s experience is that the gap in technology
adoption between Europe and the US, which potentially has a significant impact
on productivity, is beginning to narrow. The technology buying process is also
indicative of subtle differences in the decision-making processes within the
two countries.

On the one hand, he says, it takes more time for French companies to make
decisions and their processes can be less flexible. But in the financial
services sector at least, decision-making is relatively devolved – upper-middle
managers have responsibility for large budgets which, in the US, would normally
be signed off by the most senior executives. An oddity within the
highly-centralised French business culture, that may partly be explained by the
fact that many senior managers in large corporations are appointed for their
networking and political connections as much as for their operational

Ultimately, however, what sets the two business environments apart are
deep-seated cultural differences.

"The US is driven by performance and performance management, much more
than in the older countries. You find it everywhere – it is very much an
entrepreneurial mindset," Giraudon says.

"I think that collectively and individually, America supports a system
and mindset that is driven towards making money, and not challenging the idea
that everyone can make money without having to feel guilty."

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