market, have certainly contributed to the observed slowdown in labour productivity growth. however, the developments in labour supply are only part of the story. to a large extent, the slowdown in labour productivity growth can be attributed to a marked slowdown in total factor productivity growth, which is generally taken as a measure for technological progress and improvements in the organisation and overall efficiency of production. in the 1980s, total factor productivity grew on average by 1. 6 %, before declining to 1. 1 % in the 1990s and 0. 7 % between 1999 and 2007. 7 those countries that have managed to exploit the efficiency gains generated, in particular, by new technology have enjoyed stronger labour productivity growth. for instance, in the last ten years, investment in information and communication technology in the united states has doubled that of the euro area. 8 there are many factors behind the decline in total factor productivity growth. most prominently, the structural features of the european economies undermine incentives to invest in real and human capital, and reduce the flexibility of firms to smoothly and quickly adjust to their new environment, including innovations. it appears that the structural characteristics of the best performing industrialised economies, namely a more flexible labour market, a higher degree of competition in product markets and lower barriers to entry for new firms, have been more conducive to exploiting the opportunities provided by new technologies. the need for structural reform pursuing resolutely structural reforms is of the essence to improve total factor productivity and labour productivity. well - functioning and integrated markets are required to meet the challenges posed by greater innovation, to increase the adjustment capacity of an economy and, ultimately, to make europe more competitive and more dynamic. in the context of rapid technological change, a flexible labour market is essential to facilitate the adjustment of human capital to labour market needs. a high level of rigidity in the labour legislation has a particularly strong negative impact on industries experiencing rapid technological change, since it may prevent the efficient matching of workers to jobs in view of new job requirements. unfortunately, progress in increasing contractual flexibility, particularly for permanent contracts, remains slow in several euro area countries. flexible wage setting is also essential. in a number of economies, characterized by mediocre relative competitiveness, it is important that wage increases do not fully exhaust productivity gains and allow productivity performance to translate into improved competitive positions as measured by relative costs. in this context, it is the belief of the governing council that features that enforce wage rigidity and lead to non - optimal wage

##ised economies from a longer - term perspective, shows that europe has scope to better develop its growth potential. 4 one of the principal factors behind the euro area ’ s disappointing performance in the past is the low trend growth in labour productivity. indeed, the growth in labour productivity in the euro area has significantly slowed down over the past 30 years. during the 1980s hourly labour productivity in the euro area grew on average by 2. 3 %, while in the 1990s, it declined significantly to 1. 8 % and further decreased to 1. 2 % between 1999 and 2007. in contrast, hourly labour productivity growth in the us accelerated from 1. 2 % to 1. 6 % and 2. 1 % over the same periods. 5 what lies behind these disappointing developments? the impressive rise in the overall employment rate in the euro area over the past decade, which partly reflects the progress made on structural reforms, wage moderation policy and immigration flows in some most euro area countries have benefited from significantly more favourable financing conditions than in the 1990s, which has supported private and public investment, as well as fiscal consolidation. for instance, in the euro area in the nine years following the introduction of the euro, real gross capital formation grew on average by 3. 0 % per year, compared with only 1. 7 % during the nine - year period preceding the introduction of the euro. exports and imports of goods and services within the euro area rose from about 31 % of gdp in 1998 to around 40 % of gdp in 2007. the completion of a single market for services will further facilitate trade in services. the rate of increase in extra - euro area exports and imports of goods and services even exceeded that in intra - euro area trade, rising from about 32 % of gdp in 1998 to almost 44 % of gdp in 2007. extra - euro area trade has, of course, also benefited from a period of strong external demand and increasing integration at the global level. since 1999, for instance, the annual growth rate for the euro area has averaged 2. 2 % per year compared with 2. 7 % in the united states. source ameco database. data on hours worked per worker for the euro area for 2007 are assumed to be constant. data on hours worked per worker for the us are estimated using the oecd data for 2006 and 2007. european countries, has undoubtedly constituted a source of growth. 6 at the same time, specific policies aimed at increasing employment, particularly in the unskilled segment of the labour