US-Europe Differences in Technology Adoption and Growth The Role of Education and Other Policies∗

European economic growth has been weak, compared to the US, since the 80s. In previous work (Krueger and Kumar (2003)), we argued that the European focus on specialized, vocational education might have been effective during the 60s and 70s, but resulted in a growth gap relative to the US during the subsequent information age, when new technologies emerged more rapidly. In this paper, we extend this framework to assess the importance of education policy, when compared to labor market rigidity and product market regulation, which have also been suggested as reasons for US-Europe differences. Households decide between acquiring general education, which allows them to work in high-tech firms, and less costly skill-specific education, which is of value only to lowtech firms that use established production methods. High-tech firms draw a workforcespecific productivity for the new technology, and decide on whether to proceed with production and pay a portion of profits toward regulation costs, or fire the workers at a cost, and redraw a new productivity-workforce combination. Analytical characterization of the balanced growth equilibrium shows that lower firing or regulation cost increases expected growth, but causes the adopting firm to set a higher productivity threshold before it proceeds with production. A higher subsidy for general education can increase expected growth, but reduces the productivity threshold. An increased rate of technology availability can increase the gap in the growth rates of economies that differ in their policies. A “decomposition” exercise using a calibrated version of our model assigns a major role to education policy in explaining US-Europe growth differences.