progress or, as i said earlier, the contribution from science and technology. however, in practice tfp captures progress not only in technology but also in improvements in organisation and in the quality of capital, so that it is not possible to exclusively associate its evolution with purely technological advances. in fact, it was recognised long ago that, de facto, tfp is a catch - all term for all factors – except for the amount of labour and capital – and could thus be interpreted as a symbolic measure of the complexity of a growth process that is still to be fully elucidated. 3 capital deepening is the increase in capital intensity, which is the amount of capital per unit of labour input. during the period 1996 to 2004 the contribution to growth from capital deepening in the euro area was 0. 5 percentage points, while it used to be 0. 9 in the early 1990s. these developments therefore account for a large part of the slowdown in aggregate labour productivity growth. unfortunately, not much empirical work is available to allow us to draw a clear picture of the main factors behind these developments. however, it can be argued that one of the main factors driving the participation rate is estimated by the european commission at about 72 % in the euro area and about 76 % in the us in 2004. see, for example, a. musso and t. westermann ( 2005 ), “ assessing potential output growth in the euro area ”, ecb occasional paper series, no 22, january 2005. abramovitz, m ( 1956 ) : “ resource and output trends in the united states since 1870 ”, american economic review, vol. 46, no 2, pp. 5 – 23. lower capital deepening in the euro area appears to have been strong employment growth, as estimates of capital services 4 growth only show signs of a minor deterioration during the 1990s. sustained wage moderation and continued progress with labour market reforms are likely to have contributed to these developments, leading firms to shift to more labour - intensive production following earlier substitution policies in favour of capital during the 1980s and early 1990s. 5 in addition to the transitory impact on productivity via lower capital deepening, policies designed to increase the employment of low - skilled workers may have depressed average labour quality growth. available evidence provides some support for the view that labour quality increased more moderately in recent years than in the first half of the 1990s. 6 the decomposition of labour productivity growth per hour worked at the sectoral level sheds more light

has prompted some economists to suggest the existence of a ‘ european model ’ and a ‘ us model ’, related to the trade - off between labour use and productivity. 13 in their view, lower levels of gdp per capita growth in europe reflect european preferences for more leisure. there is no doubt that we are lucky to live in a peaceful and culturally diverse environment, and therefore we have very good reasons to value our leisure time. however, we should bear in mind that lower participation rates are not necessarily simply associated with our personal preferences but are also triggered by our legal and regulatory environment, our tax systems and our social institutions. this may, for example, explain the low participation rates of women in europe. measures aimed at reconciling motherhood with professional life, such as maternity leave, may raise participation rates, and the use of flexible forms of work may also provide a further incentive. 14 the empirical literature has also found evidence showing that economic growth is linked with the degree of development and structure of the financial system. 15 well - developed financial systems help to channel resources towards the most rewarding activities and therefore encourage the most efficient allocation of capital. in recent years we have also found that the financial structure is also important. most euro area countries have sophisticated banking systems, but their equity markets are less developed. it is an empirical fact that high - risk capital investments have been much larger in countries like the us, with a more developed venture capital market, than in other countries. riskier, these investments involve high - tech projects with potentially high returns and speed up the overall structural transformation of the economy triggered by science and technology. a sound macroeconomic policy setting is also the key to sustainable long - term growth. in particular, recent studies have emphasised the benefits of maintaining low and stable inflation and preventing unsustainable deficits and debts. empirical evidence confirms the highly damaging effect of inflation on long - term growth, even with moderate rates of inflation. recent analysis suggests that higher average inflation harms growth and welfare, whereas higher inflation volatility has a harmful impact on welfare and is likely to negatively affect growth. 16 there is also empirical evidence showing that oecd ( 2003 ) : the sources of economic growth in oecd countries. oecd, paris. see blanchard, o. ( 2004 ) : “ the economic future of europe ”, the journal of economic perspectives, vol. 18, pp. 3 - 26 ; and also gordon, r. j. ( 2004