What Works?

Most international comparisons conclude that American workers are the most productive in the world. An October study of service-industry productivity by the McKinsey Global Institute gives an eye-opening reason for U.S. dominance in labor productivity: deregulation.

The study compares 1990 productivity rates for the United States, Great Britain, France, Germany, and Japan. Out of five industries—airlines, retail banking, telecommunications, restaurants, and retail stores—the United States leads in every category except restaurants, where France barely finished first.

U.S. policy makers have micromanaged businesses much less than their European and Japanese counterparts. For instance, the other nations have set prices for domestic air fares and telephone calls, have limited the ability of businesses to lay off employees, and, especially in Japan, have protected "mom and pop" stores from competition by large retailers.

Because the U.S. government places fewer barriers between employers and employees and between buyers and sellers, the study says, American workers are more productive. "If entry into industries and markets is allowed," the study says, "then dynamic companies will have incentives to develop innovations that improve value to the customer by offering more service per dollar."

For instance, when the United States deregulated domestic air travel, new competitors forced established airlines to improve service and lower prices. Even though many of these upstart airlines have gone under, the study says, "competitive intensity is high among airlines in the U.S." By contrast, in Europe, where airlines are often owned by the government and routes are set by regulators, "the pressure to perform and increase productivity [is] relatively low."

Regulations that prevent employers from laying off workers also reduce productivity. Such policies, says the study, "may be a bad bargain because they give temporary shelter to existing jobs and incomes at the expense of future jobs and incomes."

The study's authors, who include MIT economist and Nobel laureate Robert Solow, suggest that worker training or apprentice programs could help those employees displaced when industries restructure. And they say policies that limit the flows of capital or labor don't help employers or employees.