Why is the US economy pulling ahead of Europe?

In 2024 the average US worker will have generated about $171,000 in economic output, compared with $120,000 in the euro area (on purchasing-parity terms), $118,000 in the UK and $96,000 in Japan. That’s a big gap that’s been getting much bigger in recent decades. Since 1990, labour productivity has risen by 70% in the US, compared with 46% in the UK, 29% in the EU and 25% in Japan. A frequent objection is that US productivity is overstated since US workers get much less holiday time than their peers abroad. But even on a per-hour basis, the gap remains sizeable – there’s been 73% productivity growth for US workers since 1990 versus 55% in the UK, 39% in the euro area and 55% in Japan. And since the financial crisis of 2008-2009, US productivity has grown by 30%, more than three times the rate in the eurozone and the UK.

What’s an average worker’s output in the US?

In 2024, the average US worker’s output per hour will be about $94, compared with about $79 in both the UK and eurozone. In Japan it’s only $58 (Conference Board data, with comparisons based on dollar purchasing-price parity in 2022). That might not seem like a massive gap, but it’s more than enough to have driven consistently higher economic growth in recent decades. And it’s a gap that’s appeared relatively recently, dating from the information and communications revolution that began in the 1990s. At the turn of the century, the US, UK and eurozone all had very similar scores on the output per worker per hour metric (around $65-$67 using the Conference Board data).

Is the US share of GDP growing?

No, but given the growing populations of first China and now India, that would be all but impossible. In purchasing-power-parity terms, the US share of the global economy has shrunk from 21% in 1990 to 16% now. What is astonishing, though, is the extent to which the US has outperformed the other mature economies in recent decades – a difference rooted in superior long-term productivity improvements. In 1990, the US accounted for about 40% of the G7 group of nations’ entire GDP. Now it’s up to about half – as big as all the other six combined – and is still growing quicker. Since the start of 2020 (just before the Covid-19 pandemic), the US economy has grown 10% in real terms, three times the rate for the rest of the G7.

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What explains the gap?

There are some broad long-run trends that help explain the difference, including America’s abundance of cheap energy and its superior record on capital investment. Non-residential capital investment has run at about 17% of GDP since the mid-1990s, much higher than in Europe. And with the exceptions of Israel and South Korea, the US invests more in research and development than any other country, at about 3.5% of GDP. It also boasts greater “business dynamism”, says The Economist. The “churn rate” of companies is 20% every year (half of them are new businesses, and half of them are those that fold). That’s appreciably higher than the 15% in Europe, reflecting the relative ease with which start-ups can access capital. Of Europe’s five biggest issuers of patents in 2005, four of the companies (Bosch, Ericsson, Philips and BASF) were still in the top five in 2023. In the US, there were four new entrants to that elite group: Microsoft, Apple, Google and IBM joined Qualcomm, reflecting US dominance in the technology sector.

What about the US labour market?

In any given three-month period about 5% of US workers change jobs, whereas in Italy the same level of churn takes a year. Such dislocation can be productive. Workers who switch jobs tend to enjoy higher wages than those who stay put, indicating they have gone to places which are making better use of their talents. Over time, this greater flexibility and churn tends to push workers, entrepreneurs and investment towards more productive sectors. That’s important because the productivity gap between the US and Europe is almost wholly the result of its outperformance in digital-intensive segments of the economy, including tech, finance, law and consulting. In manufacturing, by contrast, US productivity has stagnated.

Are there other factors?

The vast pandemic reshuffling that matched workers with new opportunities, giving them a chance to earn more and contribute more also played its part, says Matt Grossman in The Wall Street Journal. More flexible labour markets made this process easier in the US than in other major economies, but the nature of the US government’s Covid support was important, too, says Joseph Politano on Apricitas Economics – it supported people rather than jobs, letting unemployment spike but providing aggressive income support instead. This proved a better way of protecting the economy and labour productivity in the medium term.

What can Europe do better?

Europe’s social model depends on durable long-term prosperity – and that depends on closing the productivity gap. The US’s strength in technology is the difference, as Mario Draghi pointed out in his recent report on European competitiveness. “If we exclude the tech sector, EU productivity growth over the past 20 years would be broadly at par with the US,” he argues. Yet a booming tech sector would hardly solve all of Europe’s problems. Its recent underperformance is partly due to the energy shock that followed Russia’s invasion of Ukraine, says Capital Economics. But there are more deep-seated, structural factors, too – demographic trends that are fostering fiscal weakness and political instability, and a regulatory and investment environment that’s not conducive to business formation or the adoption of new productivity-enhancing technologies. Then there’s the lack of genuine fiscal union, as well as banking and capital market union. Address some of those issues, and perhaps not all will be lost.

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