Urenio Watch Watch: Knowledge Economy

The knowledge economy in Europe

A new report from The Work Foundation argues that European countries together have a ‘knowledge economy’ that is as big if not bigger than that of the US, with over 40 per cent of workers employed in knowledge-based industries. But the continent has not matched the US in terms of economic growth and productivity largely because it has not invested as much in its knowledge base and may be suffering a slowdown in technological progress as a result.

The report argues that those nations that have invested most in ‘knowledge’ – for example in research and development, information and communications technology, and higher education – have tended to enjoy relatively better economic dynamism. However, investment alone is not enough. The ability of companies to implement technological innovations efficiently is also an important factor in explaining differences of economic performance.

The Knowledge Economy in Europe finds that between 1994 and 2004, R&D spending as a share of GDP across the EU15 (there are no comparable figures for the EU25) increased by less than 0.1 per cent – and actually fell in France, the UK, the Netherlands and Ireland. In 2004, the US invested 2.7 per cent of GDP in R&D, compared with 1.9 per cent in the EU15.

The report finds:

  • Over the past decade most of the new jobs across the EU15 have come from the expansion of the knowledge-based industries, rising by 24 per cent against just 6 per cent in overall employment growth. Between 1995 and 2005, technology and knowledge based industries created 2.5 times more net jobs than the rest of the economy.
  • The biggest single group of knowledge economy jobs is education and health, which account for over 19 per cent of all jobs in Europe.
  • The Nordic countries and the UK have the biggest shares of employment in the knowledge economy; Sweden has 54 per cent, while Denmark, the UK and Finland are close behind with 50 per cent.
  • Europe has particular strength in knowledge-based services. Employment increased by 31 per cent between 1995 and 2005 in knowledge-based services – twice as fast as in ‘non-knowledge services’. Business services and communications jobs grew by 54.5 per cent.
  • Employment in knowledge based industries in the US is less than in the Nordic countries, the UK and the Netherlands. The US has about 38 per cent of its workers in knowledge economy jobs (using comparable, but different definitions).
  • The target of 3 per cent of GDP invested in research and development in the EU set by the Lisbon 2000 EU strategy council is unrealistic. R&D investment across the EU has increased by less than 0.1 per cent of GDP in 10 years, so 3 per cent is unachievable. A revised target of 2.5 per cent by 2015 is ambitious yet achievable.
  • Fiscal measures such as tax incentives to increase R&D have a role, but their impact is likely to be small. For example, tax credits in the UK are likely to add only 0.1 per cent to the amount UK businesses invest in R&D.
  • As well as in R&D, Europe lags behind the US in ICT spending. In 2004, the US invested 4.6 per cent of GDP in IT. By contrast, Europe invested 3 per cent.