##centives to work that are currently present in many european labour markets. unemployment schemes have been amended and early retirement incentives have been reduced. as a result, the countries that have introduced measures aimed at increasing flexibility of the labour market witnessed a fall in actual unemployment rates and consequently in the non - accelerating inflation rate of unemployment – the so called nairu – which is the level of the unemployment rate that does not lead to inflationary pressures. moreover, thanks to the implementation of labour market reforms the employment rate increased in most euro area countries, but the size of the increase differed across countries. in 2004 only three euro area countries met the interim lisbon employment target of an employment rate of 67 % and just one euro area country achieved an overall employment rate higher than 70 %. the euro area - wide employment rate stood last year at 63 %, while, for comparison, it stood at 71 % in the u. s. thus, if the 2010 lisbon target is to be met, employment rates need to increase much more rapidly. boosting labour productivity growth is another central component of the efforts to enhance europe ’ s growth potential. innovation and technological diffusion have an important role to play in this context. an article in the economist recently pointed out that “ europe ’ s only chance of preserving its living standards lies in working smarter than its competitors rather than (.. ) cheaper ”. in a world of pervasive globalisation and relentless technological change, our future prosperity will indeed depend on our ability to generate and exploit new knowledge and ideas. a key factor for promoting innovation and technological diffusion is research and development. most innovations result from entrepreneurial activities or investment in research and development. in this field, europe clearly suffers from a lack of 2 / 4 private investment. the lisbon strategy set a target that research and development spending should reach 3 % of gdp, two thirds of which should come from private investment. in 2003 expenditure stood at 1. 9 % of gdp for the euro area, and only one euro area country currently exceeds the lisbon target level. by way of comparison, the u. s. spends 2. 8 % of gdp on research and development. it is also important that efforts to achieve the lisbon target should be accompanied by policies that enhance the gains from efforts and money spent on research and development. productivity growth can also be boosted by more and better education and training. the right skills and competences are required to reduce mismatches in the labour market and allow for a smoother reallocation

since 1980, the average number of working hours per person employed in the euro area has been around 12 % lower than in the u. s. the difference has gradually increased and latest estimates suggest that average working hours in the euro area is currently some 15 % below u. s. levels. the lower level vis - a - vis the u. s. is partly explained by fewer actual working days per year, while the widening of the gap reflects the shortening of statutory full - time working weeks and the rising share of part - time employment. in the u. s. these latter determinants have remained broadly stable. an important question which has featured prominently in the policy discussion is whether lower labour utilisation in the euro area reflects predominantly preferences or disincentives from tax and social contribution systems. in this respect, some data show that part - time employment in both the euro area and the u. s. seems to be partly of a voluntary nature and, per se, might thus reflect individual or cultural preferences. however, having said this, it should also be borne in mind that households are influenced by their institutional environment. this includes for example taxes, social security and pension systems. such factors are providing disincentives to work. let me now continue with more recent developments. while the gap in per capita gdp growth vis - a - vis the u. s. has remained unchanged, the underlying explanation has changed. labour productivity has evolved more favourably in the u. s., whilst labour utilisation has developed more favourably in europe. on the latter, i hope and believe that these developments will continue, as the potential for catching up in this regard is very substantial. both participation rates and average hours worked are low in the euro area and unemployment rates are high. 1 / 4 why has there been a reversal of the catching up process of labour productivity growth vis - a - vis the u. s. since the mid - 1990s? the answer is partly found in the usage of information and communication technologies, which has had a beneficial effect on labour productivity in the u. s. a word of warning may be appropriate here as these kinds of comparisons are unfortunately surrounded with uncertainties due to different statistical practices and statistical measurement problems. nevertheless, when analysed by sector, it is impressive to see that, on top of the sectors that manufacture these technologies, it is the very rapid improvement in the service sectors that are using them – such as wholesale trade, retail