The United States has widened its productivity advantage over Europe, sparking fears in the EU that it faces a “competitiveness crisis” as politicians call for more public and private investment.
New data released on Friday show that eurozone productivity fell 1.2% in the fourth quarter from a year earlier, while in the United States it rose 2.6% in the same period, separate data showed. Over the past two decades, labor productivity growth in the United States has been more than double that of the Eurozone and the United Kingdom.
“Over the long term, productivity growth in the United States is expected to be higher than in Europe,” said Bart van Ark, chief executive of the UK-based Productivity Institute. “Europe does not show the same dynamism. This is widening the growth gap between the US and the EU.”
Some economists argue that the United States is growing faster than the Eurozone in part because its population is younger, growing faster and working longer hours. But much of the output gap is due to the fact that people in the United States also produce more per hour of work.
EU policymakers see the trend as deeply worrying – and a reflection of a long-standing failure to match US levels of public and private sector investment.
According to official data, output per hour worked, a standard measure of labor productivity, has grown by more than 6% in the US non-farm business sector since 2019. This far exceeds that of the Eurozone and the United Kingdom. Kingdom, which recorded growth of approximately 1% in the same period.
The recent jump in U.S. productivity comes after a massive fiscal stimulus focused on green industry, a frenzied period of rehiring and a surge in new business formation in work-from-home hot spots.
In contrast, the Eurozone received less fiscal support from governments, while suffering a much larger increase in energy prices following Russia’s full-scale invasion of Ukraine. Europe’s fragmented financial markets, fiscal policy and regulation also make it more exposed to external pressures than the United States.
“When Europe is hit by a shock, it is fragmented, so it doesn’t respond as coherently as the United States,” said Yannis Stournaras, governor of Greece’s central bank.
While short-term factors have undoubtedly fueled the U.S. recovery, some economists believe there is more to it than that.
“We have blocked productivity in the eurozone,” said Gilles MoAndc, chief economist of the insurance company Axa. “Given that the recovery has persisted for so long, we need to consider the possibility that something structural is happening.”
MoAndc notes that if Eurozone productivity continued to lag the United States by the same amount, GDP growth would be one percentage point lower each year.
Isabel Schnabel, a member of the European Central Bank’s executive board, said last month that it was “more urgent than ever” for eurozone leaders to close the productivity gap with the United States. She says this is necessary to address a “competitiveness crisis,” with European manufacturers facing higher energy prices and greater workforce challenges than their American or Chinese counterparts.
The ECB also fears that falling productivity will raise the risk that inflation will remain high pushing up labor costs for eurozone firms, as it weighs when to cut interest rates that are at record levels.
Schnabel said one of the main causes of the Eurozone’s weakness is that it has failed to reap the efficiency gains of digital technologies as the United States had done at an earlier stage. Promoting competition would be part of the answer, she said, but she also called for faster and more effective implementation of the EU’s Next Generation public investment programme.
Mario Draghi, the former ECB president, will report to the EU president later this year on more ambitious proposals to boost the EU’s competitiveness. He reportedly told the bloc’s finance ministers that they will need to find “a huge amount of money in a relatively short time” – both public and private – to bring investment to US levels.
Labor market trends have accentuated the divergence in productivity. Ariane Curtis of consultancy Capital Economics said US employers were inclined to automate more quickly when workers were in short supply, while Europeans had focused “on hiring workers to fill gaps, potentially even if there were mismatches between demand and supply of skills”.
Not all economists are convinced that the recent strength of the United States is evidence of structural change.
Erik Neilsen, chief economist at UniCredit, said the eurozone’s current weakness is “a statistical phenomenon”, as employers who struggled to hire in the post-Covid recovery are now hoarding labor in the recession. Productivity could recover – for unwelcome reasons – if the ECB’s restrictive policy crushes demand to the point of laying off workers.
Catherine Mann, an external member of the Bank of England’s monetary policy committee, told the FT last month that while labor productivity data looked “very attractive” in the United States, it was driven by demand factors, pushed into particularly from a budget deficit of more than 6 percent.
By contrast, demand is more depressed in both the Eurozone and the UK, where the economy slipped into a technical recession in the fourth quarter.
Claus Vistesen of Pantheon Macroeconomics said there are reasons to be optimistic about European productivity. “It is too pessimistic to assume that, if we are indeed on the verge of a new technology-driven productivity boom centered on artificial intelligence and related services, it will completely overtake the Eurozone.”
Additional reporting by Aiden Reiter in London