Manufacturing and Information Technology Trends in the United States and Other Industrial Countries: A Review of Major Studies

Manufacturing and Information Technology Trends in the United States and Other Industrial Countries: A Review of Major Studies

Order Code RL32457
CRS Report for Congress
Received through the CRS Web
Manufacturing and Information Technology
Trends in the United States and Other Industrial
Countries: A Review of Major Studies
July 7, 2004
Stephen Cooney
Industry Specialist
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

Manufacturing and Information Technology Trends in
the United States and Other Industrial Countries: A
Review of Major Studies
Summary
The performance of the U.S. manufacturing sector, including the loss of
manufacturing jobs, has been long and widely discussed, but the issue has intensified
since the recession of 2001. Less widely noted is that other industrial economies
have also seen a loss of employment in manufacturing. With increased labor
productivity, employment in manufacturing has declined in most industrial countries,
as well as the more industrially advanced developing economies. This point was
discussed in CRS Report RL32179, Manufacturing Output, Productivity and
Employment.
Two reports in 2004 by international bodies have analyzed the comparative
performance of U.S. manufacturing in ways that provide a report card on relative
U.S. performance. Both reports rate the U.S. economy as more effective than other
industrial countries, in using information and communications technologies (ICT) to
enhance competitiveness and growth.
The Commission of the European Union (EU) in its study, Fostering Structural
Change: An Industrial Policy for an Enlarged Europe, found that while European
industry overall has not suffered a decline in output since 1979, it has failed to match
the United States in two key respects. First, U.S. manufacturing has had superior
growth to the EU in labor productivity since 1995. Secondly, the EU report found
that this is because of better productivity and output growth in ICT products, and in
applying ICT in delivery of services.
The Organization for Economic Cooperation and Development (OECD) in 2004
produced a study, entitled The Economic Impact of ICT, which was the latest in a
series of comparative analyses. It ranked the United States as the highest among
industrial countries in its investment in ICT, used to measure “diffusion” of
technology within the economy. This propensity to invest in ICT may have
contributed to the higher rates of growth seen in the United States, compared to other
industrial countries. The OECD research indicated that relatively lower levels of
product and labor market regulation in the United States, by comparison with other
industrial countries, are important governmental variables in encouraging private
sector ICT investment, and its contribution to growth.
This CRS report will not be updated.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
European Commission Study of Industrial Trends . . . . . . . . . . . . . . . . . . . . . . . . 2
Sectoral Comparison of EU and U.S. Industry . . . . . . . . . . . . . . . . . . . . . . . 4
EU Policy Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
OECD Analysis of the Economic Impact of Information and
Communications Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
U.S. Leadership in Information Technology Investment . . . . . . . . . . . . . . . . 8
Information Technology Investment and Regulation . . . . . . . . . . . . . . . . . . . 8
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
List of Tables
Table 1. Trends in EU and U.S. Manufacturing Sectors . . . . . . . . . . . . . . . . . . . . 3
Table 2. Comparison of EU and U.S. Labor Productivity Trends . . . . . . . . . . . . . 5

Manufacturing and Information Technology
Trends in the United States and Other
Industrial Countries: A Review of Major
Studies
Introduction
The decline in U.S. manufacturing employment and perceptions of an erosion
in the U.S. industrial base have been a concern for U.S. policymakers. After the
onset of a recession at the end of 2000, the United States lost nearly 3 million
manufacturing jobs over three years, notwithstanding an economic recovery that
began in late 2001. Only in early 2004 did manufacturing employment start to
recover, adding a total of about 100,000 new jobs on a seasonally adjusted basis from
February through May, according to the Department of Labor’s Bureau of Labor
Statistics. There is widespread concern that the decline in manufacturing
employment is mostly permanent, and not just a cyclical decline. Detailed CRS
analysis found, however, that accelerated improvement in U.S. labor productivity
accounted for a reduction across many industries in hourly labor input required to
produce increased manufactured output. That analysis also looked at other countries,
finding that “the recent U.S. experience is not unique: manufacturing employment
is declining almost everywhere as productivity improves.”1
Recently, the Commission of the European Union2 (EU) and the Organization
for Economic Cooperation and Development (OECD) published reports including
analyses of comparative performance of the U.S. and other economies, especially
with reference to the impact of information and communication technologies (ICT)
on manufacturing and overall growth. The EU report included a direct comparison
of U.S. and European industry. The OECD report studied investment and diffusion
of ICT on a comparative basis in industrial economies in Europe, North America and
Asia. The two reports are similar, in that they credit the United States, in comparison
with other industrial countries, as having more success in utilizing information and
communications technologies (ICT) to enhance the transition of its economy,
including manufacturing, in the face of rapid global change.
1 CRS Report RL32179. Manufacturing Output, Productivity and Employment: Implications
for U.S. Policy, p. 39.
2 Throughout this report, the European Union is considered as the 15 countries that were
members before its expansion to 25 countries on May 1, 2004, except as noted. The
European Commission acts as its executive body.

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European Commission Study of Industrial Trends
The question of European deindustrialization was the focus of the recently
released report of the European Commission (hereafter the “Commission”),
Fostering Industrial Change: An Industrial Policy for an Enlarged Europe.3 The
conclusion was that Europe is not deindustrializing, but there were also serious
reservations about some current trends in European manufacturing, especially by
comparison with the United States.
The concern about “deindustrialization” in Europe arises from the decline in
manufacturing’s share of value added in the combined EU gross domestic product
(GDP).4 This is shown in the EU report as falling from 27.4% in 1979 to 19.0% in
2001, on a current value basis.5 The EU report found that “most industrial sectors
have recorded job losses,” and that the decline in manufacturing employment is
considered as a key factor in concerns over “deindustrialization.”6 As shown in
Table 1, employment has declined in almost all industrial sectors in Europe. Out of
26 manufactured product groups, as selected by the Commission using the
International Labor Organization’s International Standard Industrial Classification
(ISIC), only one, rubber and plastics, had greater employment in 2001 than in 1979.
However, the Commission differentiates between “industrial change” and
“absolute deindustrialization.” It states that the shift in employment from
manufacturing to services reflects in part substantial improvements in labor
productivity in manufacturing, a development that makes EU industry more
competitive, not less so, in domestic and export markets. Among the 26
manufactured product groups listed by the Commission, only five showed declines
in output in 1979-2001. These were textile mill products, clothing, shipbuilding,
leather and footwear, and mineral and nuclear fuels. As shown below in Table 1,
these five product groups are also among the less successful performers in the United
States, with respect to both output growth and employment.
3 Released as European Commission document COM(2004)274 final (April 20, 2004). The
data in this report are drawn from a detailed statistical analysis published earlier by the
Commission, EU Productivity and Competitiveness: An Industry Perspective, Mary
O’Mahony and Bart van Ark, eds. (Luxembourg: Office of Official Publications of the
European Communities, 2003).
4 The U.S. Commerce Department Bureau of Economic Analysis defines “value added” as
the market value of the output produced by an industry, less its intermediate inputs.
5 EU Commission, Fostering Structural Change, Fig. 1.
6 Ibid., p. 4.

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Table 1. Trends in EU and U.S. Manufacturing Sectors
(See notes and sources on next page)
Compound Annual
Growth 1979-2001 (%)
Industry
Output
Employmt.†
EU
US
EU
US
Electronic components (including semiconductors)
8.5
19.3
-0.1
1.8
Computers and office machinery
7.4
22.6
-0.6
0.2
Telecommunications equipment
7.3
5.0
-1.2
-2.8
Radio and TV receivers, consumer audio & video eq.
3.9
2.6
-2.3
-0.8
Chemicals
3.4
1.6
-1.3
-0.3
Electrical machinery
2.5
0.9
-0.7
-1.2
Photographic suppl. & eq., optical lenses, watches & clocks
2.5
0.4
-1.8
-2.6
Electricity measuring-controlling, sci. & medical instruments
2.4
7.1
-0.2
2.8
Rubber and plastics
2.4
4.2
0.6
2.6
Aircraft and spacecraft
2.1
1.3
-0.6
-0.8
Pulp, paper and paper products
2.0
1.2
-1.0
-0.3
Motor vehicles
1.6
2.0
-0.7
0.6
Printing and publishing
1.6
1.4
-0.1
1.2
Non-metallic mineral products. (stone, clay, glass, etc.)
1.1
0.5
-1.3
-0.8
Wood products
1.1
1.3
-1.0
0.2
Insulated wire and cable
1.1
2.6
-1.0
0.7
Food, beverages and tobacco products
1.1
1.5
-0.6
-0.1
Fabricated metal products
0.8
1.0
-0.8
-0.5
Basic metals
0.7
-3.5
-3.1
-3.0
Industrial machinery
0.6
2.1
-1.1
-0.7
Furniture and miscellaneous manufacturing*
0.4
1.8
-0.7
0.4
Clothing
-0.2
0.6
-3.4
-3.4
Shipbuilding
-0.2
0.6
-3.4
-1.3
Textile mill products
-0.8
0.2
-3.2
-2.3
Leather and footwear**
-1.1
-2.9
-3.3
-5.6
Petroleum refining,, coal products and nuclear fuel***
-3.6
-0.1
-2.0
-2.8

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Sources: European data from European Commission. Fostering Structural Change, Tables 3 and 4.
U.S. industry output data from U.S. Dept. of Commerce, Bureau of Economic Affairs. “Gross
Domestic Product by Industry data: Shipments of Manufacturing Industries,” output and price data
reported on SIC basis, 1977-2001. U.S. employment data from U.S. Dept. of Commerce, Bureau of
the Census, Annual Survey of Manufactures (1979); and, Bureau of Economic Affairs, Office of
Productivity and Technology, unpublished data on employment (SIC basis), 2000.
Notes: Industry descriptions altered from EU report for clarity, based on ISIC and U.S. SIC code
descriptions. The present report has adjusted U.S. data based on the Standard Industrial Classification
(SIC) system, no longer in use in the United States, to try to align categorizations with the EU report
insofar as possible for 1979-2001. The following note specific categories where such adjustments were
not readily possible:
*Includes recycling industries for EU only.
**Includes non-leather footwear for EU only.
***US does not include nuclear fuel.
†US employment data on SIC basis available through 2000 only.
As found in the earlier CRS report, U.S. manufacturing’s share of current-dollar
GDP declined in a similar way as it did in Europe during the same period. The CRS
report also highlighted the significance of improved labor productivity in the U.S.
manufacturing sector.7 Consequently, as shown in Table 1, most U.S. industries
increased absolute output levels between 1979 and 2001, even though many also
displayed declining employment.
Sectoral Comparison of EU and U.S. Industry
Despite common U.S.-European trends and overall European growth in output,
the European Commission in its report nevertheless viewed the data on relative
competitiveness with some concern. It noted a significant slowdown in the rate of
EU labor productivity after the mid-1990s, as shown in Table 2. According to this
analysis, the trend in overall EU labor productivity improvement was stronger than
in the United States in 1979-1995. The annual EU rate of improvement of labor
productivity in manufacturing alone during this period was approximately the same
as the U.S. rate, about 3.5%. However, in 1995-2001 the rate of annual U.S. labor
productivity improvement in manufacturing increased to 3.8% , according to the EU
report, while the rate of improvement in Europe was only 2.3%. The Commission
noted that better performance by some EU national economies (Finland, Ireland,
Sweden), as well as in the United States, is evidence that a decline in productivity
was not an inevitable result of other broad economic trends.8
7 See CRS Report RL32179, Figs. 2 and 4, and pp. 7-10.
8 European Commission, Fostering Structural Change, p. 6.

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Table 2. Comparison of EU and U.S. Labor Productivity Trends
Annual %
European Union
United States
Increase:
1979-90
1990-95
1995-
1979-90
1990-95
1995-
2001
2001
Total
2.2
2.3
1.7
1.4
1.1
2.3
Economy
Manufacturing
3.4
3.5
2.3
3.4
3.6
3.8
Source: European Commission. Fostering Structural Change, Table 2.
Secondly, the European Commission also commented that, by comparison to the
United States, the EU’s performance was especially disappointing in “high-tech
sectors.” A review of Table 1 shows that the EU beat the United States in 11 of 26
categories, when one compares output growth data in manufacturing on a sector-by-
sector basis over the 1979-2001 period. However, the point made by the
Commission is that while, “Growth in Europe’s labor productivity in sectors with a
strong technological content has been robust in comparison with the overall economy
... it has, on the whole, been significantly lower than in the United States in these
sectors.”9 Looking at Table 1, one can see that this has led to higher rates of U.S.
output increases especially in computers and office machines, electronic components
(including semiconductors), scientific instruments (a category that includes medical
equipment, and measuring and controlling instruments, such as those used in
electronics manufacturing), and insulated wire and cable (which includes fiber
optics).10 The Commission found that the gaps between U.S. and EU productivity
improvement rates were growing notably in those industries that manufacture ICT
equipment. The gap in these trends was also growing in those services that are
intensive ICT services users.11 This will be discussed in more detail when reviewing
the OECD analysis below.
9 Ibid.
10 Generally, the EU and OECD reports use the designations “high technology” and
“information and communications technologies” (ICT) interchangeably. In the United
States, “high technology” may also be used interchangeably with “advanced technology,”
a concept developed by the U.S. Commerce Department. This includes information
technology products, but also a variety of other manufactures, such as biotechnology,
pharmaceutical and aerospace products. See for an analysis, Ernest H. Preeg, The
Threatened U.S. Competitive Lead in Advanced Technology Products (Arlington, VA:
Manufacturers Alliance, 2004), p. 2 and Table 1. For purposes of comparison, the present
report considers only ICT products, as designated by the EU and the OECD, as “high
technology.”
11 European Commission, Fostering Structural Change, p. 6 and Table 7, with data taken
from the more detailed study, EU Productivity and Competitiveness: An Industry
Perspective. As noted in CRS Report RL32179, pp. 18-19, esp. fn. 35, real (constant-
currency) comparisons over time in “ICT” industries are extremely problematic, and the
U.S. Commerce Department discourages reliance on such data. To minimize distortions
between U.S. and EU output data, the EU researchers adopted the U.S. deflators for these
products.

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Conversely, the EU report finds that U.S. output growth is slower than in the EU
in some traditional industrial sectors. According to Barry Bosworth of the Brookings
Institution, in reference to the performance of U.S. industry, “Everybody’s talking
about high rates of growth in productivity. But it’s in two areas: high technology and
services. The rest of the goods-producing industries have not shared in this.”12 A
number of important U.S. manufacturing sectors have not experienced high rates of
productivity growth: cement (included in the ISIC category of non-metallic minerals),
fabricated metal products, furniture, printing, food manufacturing, electrical
equipment, paper and primary (basic) metals. With the exception of furniture, which
the Commission and the ISIC combine statistically with “miscellaneous”
manufacturing, U.S. overall output has grown slower, or not appreciably faster than,
the EU performance in these product groups, as shown in Table 1.13
EU Policy Conclusions
Nevertheless, a continued ability to match labor productivity trends and output
growth of U.S. industries in certain sectors of traditional European strength, such as
chemicals and electrical machinery, is of relatively little comfort to the European
Commission. It believes that these product groups are more vulnerable to
competition from developing economies, both the more advanced competition from
East Asia, and the newer competitors looming in China and India. The Commission
believes that there will naturally be shifts of production, as well as research and
development activities, to such countries as they become increasingly important to
industrial producers’ global competitive position. Moreover, competition from these
countries will intensify, not only in traditional industries, where cost and market
location considerations are paramount, but also increasingly in high technology
fields, where ICT technical proficiency is important.14 While facing such challenges,
the Commission believes that the EU is not well positioned, compared to the United
States or Japan, in specializing more in industries requiring higher levels of private
sector research and development activities and industrial innovation. The report cites
data to show that the EU trails the United States in many dimensions on such
factors.15
The Commission report proposes a multidimensional approach to resolving the
problems of lagging EU competitiveness, measured in terms of labor productivity
gains and output increases in “high-tech” sectors, with regard to the United States
and other industrial regions. It emphasizes the 2004 enlargement of the EU as a
unique answer to the competitiveness problem. The Commission views the new
member states, particularly the larger economies of eastern Europe, as vital sources
of well educated and trained, or highly trainable, labor at competitive wage rates.
The Commission believes that this productive potential can be readily integrated into
12 Business Week, “U.S. Factories: Falling Behind” (May 24, 2004), pp. 94-96.
13 These are categories cited as examples in ibid., and are based on latest U.S. data, which
may not exactly correspond to either the categories listed in the Commission report, or
earlier U.S. SIC-based data categories.
14 European Commission, Fostering Structural Change, pp. 10-13.
15 Ibid., pp. 6-10.

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the EU through expansion of the common body of EU law and treaty obligations, and
provide a competitive production source across many industries, in both European
and export markets.16
Beyond EU expansion, the Commission reviewed a range of other policy areas.
It argued for increased sensitivity to the need for a “regulatory environment favorable
to industry” in competition policy, environmental policy and tax policy. The
Commission in particular emphasized the need to encourage research and
development (R&D) more systematically.17 Specifically, the EU has proposed
“creation of a ‘European Research Area’ designed to create an internal market for
research and technology and counter the fragmentation currently affecting European
research ... [as well as] an action plan to increase investment in research and meet
the objective ... of increasing total R&D spending in Europe to 3% of GDP by
2010.”18 The Commission report summarizes this action plan, a similar plan on
“innovation policy,” and a plan to be proposed for a “strategic agenda on the future
of research in the manufacturing industry.” The Commission complements the focus
on R&D with proposed policies to improve “human capital and worker training,” and
to “create a coordinated approach of Community policies in the field of ICT.”19
OECD Analysis of the Economic Impact of
Information and Communications Technologies
The OECD Directorate for Science, Technology and Industry in recent years has
produced a series of reports and analyses on the “new economy:” generally, the
impact of “ICT” on overall economic growth and development. In early 2004, it
produced a further report in this series, The Economic Impact of ICT: Measurement,
Evidence and Implications.20 As in the EU’s analysis, the OECD study makes
specific comparisons between the performance of U.S., European, and in this case,
some other industrial economies.
The focus of the most recent OECD study is on the key question that the
European Commission policymakers have been grappling with, namely what
encourages a greater “diffusion” of ICT into the general economy? The bulk of the
16 Ibid., pp. 14-17.
17 For a concise discussion of the present state of European government-industry cooperation
especially in ICT and the semiconductor industry, see the section on “European
Partnerships” in Charles W. Wessner, ed., Securing the Future: Regional and National
Programs to Support the Semiconductor Industry, (National Research Council:
Washington, 2003), pp.137-148.
18 As of 2000, total EU R&D spending was less than 2% of GDP; OECD Science,
Technology and Industry Scoreboard, 2003 ed., Fig. A3. By comparison, the U.S. total was
2.8% of GDP in 2001 (National Science Foundation, Science and Engineering Indicators,
2004, vol. 2, Table 4-43).
19 European Commission, Fostering Structural Change, pp. 17-27.
20 OECD. The Economic Impact of ICT: Measurement, Evidence and Implications (Paris,
2004).

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study examines a number of firm and industry comparative studies in specific OECD
countries. The authors admit that many of their conclusions are tentative, in part
because the data series are not definitive. ICT diffusion, the subject of the study, is
itself a relatively new phenomenon, and reliable data series do not have a long
history. The present CRS report focuses on the second chapter in the OECD study.
This develops cross-national conclusions and comparisons, based on “recently
developed official statistics,” which the authors feel “provide a sound basis for
international conclusions.”21
U.S. Leadership in Information Technology Investment
The OECD report finds that the United States leads the other economies, in
terms of how much of its capital investment has gone into ICT.22 ICT investment is
measured as a share of gross fixed non-residential capital formation in each of 18
countries. In 2001, the U.S. percentage was about 28%; it was the only country
whose percentage of such investment was greater than 25%.23 Also, when measured
against the levels of 1980 and 1991, the U.S. percentage of capital investment in ICT
had increased progressively and steadily. Among other countries, the United
Kingdom, Sweden, the Netherlands, Canada and Australia each placed more than
20% of capital investment in ICT, Finland was above 17%, Germany, Japan and Italy
were above 15%, Ireland was just at 15% (but growing rapidly), and France was
about 12% (just above Portugal, at the bottom of the group). Considering also the
absolute size of the U.S. economy by comparison with the other countries, this
statistic alone indicates how large is the U.S. lead in terms of its installed ICT base,
and, presumably, the competitive advantage thereby derived.
Information Technology Investment and Regulation
The OECD report sought to find indicators of what encouraged or discouraged
firms’ investment in ICT. Much of the report examines specific case studies and
microeconomic indicators, such as the size of firms that utilize ICT and specific
reasons why firms do not make ICT investments (such as concerns with data security
and lack of trained personnel). But of particular interest with regard to the policy
perspective were the findings of the OECD study with respect to the “business
environment” that governments create for the operation of companies. The OECD
report found that higher levels of investment in ICT is generally linked to lower
levels of detailed government regulatory control in an economy, defined as “product
market regulation” and “employment protection legislation.” These two measures
21 Ibid., ch. 2, “The Diffusion of ICT in OECD Economies,” by Dirk Pilat and Andrew
Devlin.
22 “ICT” for the purpose of this project consists of the “high tech” manufacturing categories
identified by the European Commission in the comments above on Table 1, plus consumer
electronics, and the following ISIC services categories: wholesale of machinery, equipment
and supplies; renting of office machinery and equipment; telecommunications; and,
computer and related activity, including consulting, maintenance and data processing
services; ibid., p. 21.
23 The latest available data may be from an earlier year for some countries in the list.

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were based on “summary indicators” developed in an earlier OECD working paper.24
Product market regulation was based on a series of measures of government
intervention in the economy. These measures included relative size of the public
enterprise sector, its scope, role of legislation in controlling public, privatized and
private enterprises, administrative burdens on enterprises, legal barriers (including
barriers to entry for new enterprises), licensing requirements and price controls. The
OECD report used an index scale from 0 to 6 to measure levels of product market
regulation among 18 member countries, including the United States, Japan and most
EU member states. All countries scored within a range of <1.0 to 3.0. The authors
of the chapter related this index to the level of investment in ICT as a share of non-
residential gross fixed capital formation. According to the authors:
... Product market regulation can limit competition ... Since ICT offers firms new
capabilities, e.g., in selling or purchasing on-line, firms may be able to enter
markets and introduce products and services that were not feasible before ... ICT
might thus enable the introduction of competition in markets that were previously
characterized by low competition, for example a national or regional monopoly.
Product market regulations may also reduce the incentives for firms to innovate
and develop new ICT applications.
The study found that “Countries that had a high level of [product market]
regulation in 1998 had lower shares of investment in ICT than countries with low
degrees of product market regulation.” The United Kingdom, the United States,
Australia and Ireland were the only countries among the 18 studied with a score of
1.0 or less on the product market regulation scale, and as noted above, the first three
also ranked above 20% in the ratio of ICT investment to gross capital formation. The
three countries with the highest levels of product market regulation (index scores
>2.0) were Italy, Greece and France, which also ranked among the lowest countries
in ICT investment intensity, at 15% or less. Germany and Japan ranked about the
middle on both dimensions.25
The OECD report also measured the extent of ICT investment against the
strictness of employment protection legislation. Again, the OECD constructed a six-
point scale based on legislated restrictions on working hours, notice and severance
pay requirements for “no-fault” dismissal of permanent, full-time workers, and
constraints on temporary employment.26 The authors hypothesized that, “If firms
cannot adjust their workforce or organization and make ICT effective within the firm,
they may decide to limit investment or relocate activities.”
24 OECD. Economics Dept. Working Paper no. 226, “Summary Indicators of Product Market
Regulation with an Extension to Employment Protection Legislation,” by G. Nicoletti, S.
Scarpetta and O. Boyland (ECO/WKP (99) 18, April 2000).
25 In statistical terms, the correlation between the two indices was -0.54. Ibid., p. 30 and Fig.
2.10. The OECD authors noted that the market regulation rankings were based on 1998 data,
and that some countries had passed new liberalizing legislation since then.
26 OECD. Nicoletti et al., “Summary Indicators,” pp. 40-43.

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The authors found a fairly strong negative correlation between scores on this
six-point index of employment protection legislation and the ratio of ICT investment
intensity. The United States was by far the lowest-scoring country on employment
protection legislation and the highest on ICT investment intensity. The United
Kingdom was second-lowest in employment protection, and second-highest in ICT
investment. Following what some in Europe call the “Anglo-Saxon model,”
Australia and Canada both scored 1.0 or less on the employment protection index and
were among the leaders in ICT investment. Among the continental European
countries, Denmark scored lowest on employment protection and third-highest on
ICT investment. Netherlands and Sweden both scored high (more than 20%) on ICT
investment, but both were over 2.0 on employment protection. However, Japan and
Germany scored between 2.5 and 3.0 on employment protection, compared to their
mid-range scores on ICT investment. France, Spain, Italy, Greece and Portugal were
all above 3.0 on the employment protection legislation index and were also among
the lowest scores on ICT investment. The OECD report’s authors also noted that two
independent studies published in 2002 confirmed such links between levels of
legislated employment protection, ICT investment and productivity performance.27
Conclusion
As noted in the European Commission study, many factors influence
manufacturing performance, not all of which are covered here. The EU authors state,
for example, that they did not consider the impact of exchange rates or trade issues
on industrial performance. But within the limits of the EU and OECD reports, the
main features of a comparison between U.S. and European manufacturing
performance are reasonably clear.
! Manufacturing in both Europe and the United States experienced
declines in its shares of the overall economy, in terms of both
employment and current-value GDP. However, manufacturing
output has increased over this period, so that it may be misleading
to talk about “deindustrialization.”
! The European Commission is concerned, however, that the U.S.
manufacturing sector has clearly been outperforming Europe since
the mid-1990s in information and communication technologies
(ICT), the fastest-growing “high tech” sectors of modern economies.
! OECD economists, comparing performance across many industrial
economies, find that the United States has had by far the highest rate
of growth in ICT investment. They also find that such investment
in the United States appears to be positively influenced by the
relatively low degree of product market regulation and legislated
employment protection compared to other industrial countries.
27 Correlation between the indices was -0.65. Ibid., p. 30 and Fig. 2.11. The employment
protection index was based on legislation in place in 1998.

CRS-11
Both the EU and the United States are examples of mature industrial economies
(as is Japan, also included in the OECD study), which are struggling with the effects
of multiple transitions. The ratio of jobs in manufacturing to those in services is
declining, high labor productivity in manufacturing means fewer well-compensated
manufacturing production jobs per unit of output, and ready availability of trainable
labor in developing countries in an increasingly globalized world economy has
encouraged offshore outsourcing of industrial products and processes. Both the EU
and the OECD studies appear to conclude that the U.S. manufacturing economy has
outcompeted its EU counterpart, not in all product groups, but certainly in promoting
the manufacture of ICT products and the application of ICT throughout the economy.
With different purposes, the EU and OECD studies appear to arrive at differing
policy conclusions. Emphasizing the policy areas under its purview, the European
Commission foresees that Europe can address the problem of lagging labor
productivity and investment in ICT through full integration of new member
countries in the internal EU market, greater and more systematically coordinated
support of R&D within the EU, and attention to other policy areas, such as
competition policy.
Though focused on the microeconomic factors that appear to promote or hinder
firms’ adoption of ICT, the OECD study comes to an unambiguous conclusion with
respect to the “business environment” provided by government: higher levels of
product market regulation and legislated job protection effectively discourage wider
use of ICT in industrial economies. Among eighteen OECD member industrial
nations, the United States clearly had the highest percentage of investment in
information and communication technologies as a share of gross non-residential fixed
capital investment. The United States also scored the lowest on an index of strictness
of employment protection legislation, and was in the lowest-scoring group on
strictness of product market regulation. From this comparative review of the policy
evidence contained in these international studies, it would appear that increased
governmental efforts to regulate product and labor markets in the business
environment reduces the investment in information technology and, possibly, its
contribution to overall growth.