An employee straightens displays at a store in Clifton, New Jersey, earlier this year. Some economists argue the US is growing faster than the eurozone in part because its population is younger and working longer hours. Photo / Seth Wenig, AP
An employee straightens displays at a store in Clifton, New Jersey, earlier this year. Some economists argue the US is growing faster than the eurozone in part because its population is younger and working longer hours. Photo / Seth Wenig, AP
The US has widened its productivity lead over Europe, sparking fears in the EU that it faces a “competitiveness crisis” as policymakers call for greater public and private investment.
New data released on Friday showed eurozone productivity fell 1.2 per cent in the fourth quarter from a year earlier, whilein the US it rose 2.6 per cent in the same period, separate data showed. Labour productivity growth in the US has been more than double that of the eurozone and UK in the past two decades.
“In the long term, productivity growth in the US is projected to be higher than in Europe,” said Bart van Ark, managing director at the UK-based Productivity Institute. “Europe is not showing the same dynamism. That is widening the growth gap between the US and the EU.”
Some economists argue that the US is growing faster than the eurozone in part because its population is younger, growing more rapidly and working longer hours. But a big part of the output gap is because people in the US also produce more for each hour that they work.
EU policymakers view the trend as deeply worrying — and a reflection of a long-standing failure to match US levels of private or public sector investment.
Output per hour worked, a standard measure of labour productivity, has grown more than 6 per cent in the US non-farm business sector since 2019, according to official data. That far outpaces the eurozone and UK, which have seen growth of around 1 per cent over the same period.
The recent jump in US productivity comes after a massive fiscal stimulus centred on green industry, a frenzied period of rehiring and a surge in new business formation in homeworking hotspots.
By contrast, the eurozone has received less fiscal support from governments while suffering a much bigger rise in energy prices as a result of Russia’s full-scale invasion of Ukraine. The fragmentation of Europe’s financial markets, fiscal policy and regulation also makes it more exposed to external pressures than the US.
“When Europe is hit by a shock, it is fragmented, so it doesn’t respond as coherently as the US,” said Yannis Stournaras, governor of Greece’s central bank.
While short-term factors have undoubtedly fuelled the US rebound, some economists think there is more to it than that.
“We have stalled productivity in the eurozone,” said Gilles Moëc, chief economist at the insurer Axa. “Since the uptick has been persisting for so long, we need to contemplate the possibility that something structural is happening.”
Moëc notes that if eurozone productivity continued to lag the US to the same extent, GDP growth would be a percentage point lower each year.
Isabel Schnabel, a member of the European Central Bank’s executive board, said last month it was “more urgent than ever” for eurozone leaders to close the productivity gap with the US.
She said that was needed to address a “competitiveness crisis”, with EU manufacturers facing higher energy prices and bigger workforce challenges than their American or Chinese counterparts.
The ECB also worries that falling productivity will increase the risk of inflation staying high by pushing up labour costs for eurozone companies, as it weighs when to cut interest rates that are at a record high.
An employee straightens displays at a store in Clifton, New Jersey, earlier this year. Some economists argue the US is growing faster than the eurozone in part because its population is younger and working longer hours. Photo / Seth Wenig, AP
Schnabel said one root cause of the eurozone’s weakness was that it had failed to reap the efficiency gains of digital technologies as the US had done at an earlier stage. Fostering competition would be part of the answer, she said, but also called for swifter, more effective implementation of the EU’s Next Generation programme of public investment.
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 has reportedly told the bloc’s finance ministers that they will need to find “an enormous amount of money in a relatively short time” — both public and private — to bring investment up to US levels.
Labour market trends have accentuated the divergence in productivity. Ariane Curtis at the consultancy Capital Economics said US employers were apt to automate faster when workers were scarce, while Europeans had focused “on hiring workers to fill gaps, potentially even if there were skills mismatches”.
Not all economists are convinced that recent US strength is evidence of a structural shift.
Erik Neilsen, chief economist at UniCredit, said the eurozone’s current weakness was “a statistical phenomenon”, as employers who struggled to hire in the post Covid upswing were now hoarding labour in the downturn. Productivity could rebound — for unwelcome reasons — if tight ECB policy squeezed demand until they eventually laid workers off.
Catherine Mann, an external member of the Bank of England’s monetary policy committee, told the FT last month that while labour productivity numbers looked “very attractive” in the US, they were driven by demand factors, pushed in particular by a budget deficit of more than 6 per cent.
By contrast, demand is more depressed in both the euro area and the UK, where the economy slipped into a technical recession in the fourth quarter.
Claus Vistesen at Pantheon Macroeconomics said there were reasons for optimism on European productivity. “It’s too pessimistic to assume that, if we are indeed on the cusp of a new technology-driven productivity boom centred around AI and related services, this will pass the eurozone by completely.”
