Reaching higher productivity growth is vital to France and Germany's future standard of living. Fortunately, it is fully within their grasp. European sector experience indicates clearly that the key is business and technology innovations made possible by appropriate regulation that spurs high competitive intensity at the sector level.
France and Germany's labor productivity had been closing the gap with the U.S. for almost 50 years following World War II. However, that trend reversed itself in the 1990s when U.S. productivity grew at a faster rate and the gap with Germany and France started to widen again.
Looking for Answers, Sector by Sector
Given an aging population in both countries, future living standards depend on high productivity growth. To provide a better understanding of the true drivers of, and barriers to, higher productivity growth, we performed an extensive, in-depth analysis of the labor productivity performance of six sectors in France, Germany, and the U.S. The sectors we examined were: Telecommunications, Retail banking, Automotive, Road freight, Retail trade, and Utilities.
Courting Competition and Smart Regulation
What we learned is that business and technology innovations play a critical role in raising productivity across the entire economy. France and Germany have the potential to reach higher productivity growth again if smart regulation and the resulting competitive pressures force businesses to adopt and leverage innovations. Both policy makers and business leaders have a part to play.
The Responsibility of Policy Makers
Policy makers are responsible for improving regulatory conditions to create a healthy competitive environment in all sectors. They have already begun to dismantle some regulatory barriers (with great positive impact on sector productivity), but many opportunities remain. Policy makers also need to ensure that the regulatory changes lead to economic and employment growth. They also need to facilitate the redeployment of displaced workers and foster an environment in which innovative sectors can grow.
The Responsibility of Business Leaders
Business leaders, for their part, need to take into account all aspects of productivity improvement. Their key lever to improve productivity – and thus maintain profitability – is the development and diffusion of innovative products, services, and processes. In some industries, they will also need to find more efficient economies of scale through further consolidation. A broad perspective on productivity will also put them in a position to recognize and exploit further improvement opportunities along the entire value chain: either in the form of vertical collaboration or through horizontal specialization.
