in labor productivity growth rates across countries, it is noticeable that the overall dispersion (last two rows in the Table) did not change in the 1990s as compared with the 1980s, despite the significant widening of GDP growth rates. A key factor to reconcile growing disparities in GDP per capita growth rates in a context of broadly stable differences in labor productivity growth is a divergence in employment and hours patterns. Significant increases in total hours worked in Ireland, the Netherlands, Spain, the United States and Australia contrast sharply with slumps in Japan, and a number of European countries.

The table also suggests significant differences in the drivers of labor productivity. In most European countries, high (or even rising) productivity growth rates have been achieved by a marked process of capital deepening, which, given the poor employment performance, was largely due to substitution of labor with capital rather than to strong investment in physical capital (see also Scarpetta _et al._ 2000 for more details). In contrast, labor productivity has been driven by a combination of capital deepening and growth in MFP (i.e. a proxy for technical progress) in Australia, Ireland, Canada, Norway, New Zealand and the United States. As shown in the table, these are the countries where most of the drivers of growth have improved leading to acceleration in overall GDP growth.

The group of countries that have enjoyed better economic performance -- through a combination of higher employment, investment and acceleration in MFP -- include all of those that have implemented significant structural reforms over the past decade (e.g. Australia, Ireland, New Zealand) or where underlying market conditions have always been favorable (e.g. United States).<sup>3</sup> By contrast, growth performance has been lower in a number of (European) countries where structural reforms have lagged behind. This preliminary evidence is appealing and seems to support our interest for looking at the structural factors influencing market behavior.

Productivity growth has also differed significantly across manufacturing industries within each country (Chart 1). In the United States and Japan, productivity growth was primarily driven by high-tech industries in the 1990s. By contrast, in most European countries, industries adopting low or intermediate technologies played a more important role in aggregate manufacturing productivity growth. Differences in industry-specific conditions across countries, as well as regulations and institutions affecting firms’ behavior are likely to underlie some of the cross-country variance in these industry productivity growth rates and in the technological specialization of countries. In the next section we focus on the possible role of regulations and institutions in the labor market as a possible factor driving productivity _via_ its impact on the incentives to innovate and adopt leading technologies.

# **2. The links between regulations and institutions on the labor market and productivity: some theoretical considerations**

What is the role of labor market regulations and institutions in the process of technological adoption and innovation? It should be stressed at the outset that these regulations and institutions are primarily 3 . For more details on recent reforms in labor and product markets see OECD (1999).

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