Labour productivity growth in the euro area and the United States: short and long-term developments

Prepared by António Dias da Silva, Paola Di Casola, Ramon Gomez-Salvador and Matthias Mohr

Published as part of the ECB Economic Bulletin, Issue 6/2024.

Between the fourth quarter of 2019 and the second quarter of 2024 labour productivity per hour worked increased by 0.9% in the euro area, whereas it increased by 6.7% in the United States. Labour productivity growth in the euro area has historically lagged behind that in the United States, but the developments in the euro area since the start of the pandemic have been particularly weak. Productivity growth started diverging in the second quarter of 2020, as total labour input as a share of GDP decreased more strongly in the United States than in the euro area, leading to a more significant rebound in productivity (Chart A). This was due in part to the implementation of job retention schemes in the euro area while unemployment was surging in the United States. After briefly narrowing, the gap in productivity growth started widening again after mid-2022, when euro area productivity growth was depressed following the large energy price shock. In this box, we address the role of sectoral productivity and historical developments in explaining the recent gap in overall productivity growth between the two regions. This gap reflects both cyclical and structural factors.

Chart A

Labour productivity in the euro area and the United States

(Q4 2019 = 100)

The slower growth in euro area labour productivity between the fourth quarter of 2019 and the first quarter of 2024 was rather broadly based across sectors. In the United States, hourly labour productivity in market services increased by 12.4%, whereas in the euro area it increased by just 3.8% in the same period (Chart B). Two sub-sectors experienced much stronger growth in the United States than in the euro area. In the United States, information and communications grew by 27.2% and professional services by 18.7%. By contrast, in the euro area these sub-sectors only grew by 6.5% and 5.0% respectively. As regards the industry sector, hourly labour productivity increased by 8.8% in the United States, whereas in the euro area it increased by just 0.8%. However, between the fourth quarter of 2019 and the first quarter of 2022, productivity growth in the industry sector was similar in both regions. In contrast, the rise in gas prices from 2021, which was aggravated considerably by the repercussions from the Russian war against Ukraine, was stronger and lasted longer in Europe than in the United States. It therefore had a significantly stronger impact on the industry sector in the euro area, where output growth slowed and employment remained high. Across the four sectors considered in Chart B, only the public services sector recorded higher productivity growth in the euro area than in the United States. Previous analysis has shown that higher productivity growth in the United States since the pandemic is associated with labour market churn and higher investment in digitalisation.^[1] These broad-based developments highlight the contrasting cyclical nature of productivity in the two regions. While productivity in the euro area is highly procyclical, it tends to be less so in the United States, where labour is more flexibly adjusted to production.^[2] Consequently, as GDP growth was weaker in the euro area compared with the United States, the stronger procyclicality in the euro area magnified the differences in productivity growth.

Chart B

Hourly labour productivity growth by main sectors

(cumulative change from the fourth quarter of 2019 to the first quarter of 2024)

In both regions, productivity growth was primarily driven by growth within sectors rather than a change in the sectorial composition. This occurred despite abrupt shifts in production across sectors during the pandemic – initially because of lockdowns and subsequently due to disturbances in global supply chains.^[3] Reallocation of labour from low to high-productivity sectors (between components) was positive in 2020 but had a limited positive impact on the cumulative change in productivity after the first quarter of 2020 in both regions (Chart C). This limited impact reflected the closing and subsequent reopening of low-productivity sectors. Overall, the positive reallocation achieved in 2020 accounts for half of the cumulative productivity growth in the euro area from 2020 to 2023. This effect was equally large in the United States, but appears more limited in relative terms due to the country's significantly higher productivity growth.

Chart C

Shift-share analysis of hourly labour productivity developments

(annual and cumulative changes, 2020-23)

The post-pandemic developments add to the two decade-long widening of the productivity gap between the euro area and the United States, pointing to the role of structural factors. Between 1995 and 2019 the US labour productivity per hour worked increased by about 50% – or 2.1% a year. In the euro area it only increased by 28% – or 1% a year – during that time.^[4] A decomposition of productivity into capital deepening and total factor productivity (TFP) shows that in the first decade of this century euro area productivity suffered from an accentuated decline in TFP (Chart D). From 2014 to 2019, TFP recovered somewhat, while the contribution of capital deepening was negative. Some authors find that the greater ability of the United States to create and to use digital technologies in the production process is one of the main drivers of the US-euro area productivity gap.^[5] While the recent increase in illegal immigration could have somewhat inflated productivity growth since the pandemic, its impact is assessed as limited. In the euro area, the impact of digitalisation is very heterogeneous across sectors, and fewer firms benefit significantly from it than in the United States. This may in part be related to the relatively smaller size of firms in the euro area.^[6] Our own calculations using EU KLEMS data (on capital (K), labour (L), energy (E), materials (M) and service (S) inputs) show that in the period 1995-2019 the information and communications sector contributed about 20% of total hourly labour productivity growth in the United States, whereas in the euro area the contribution of this sector was only about 12%.

Chart D

Decomposition of hourly labour productivity growth

(annual percentages)

In summary, the divergence in productivity growth between the euro area and the United States has both cyclical and structural features. The euro area’s significantly lower productivity growth over the last four years is partly explained by the more pronounced cyclical nature of productivity growth in this region, a stronger and longer-lasting suppression of production and real incomes by the increase in energy prices, and a stronger impact of the uncertainty related to the Russian war against the Ukraine. However, over the two decades preceding the pandemic, labour productivity in the United States increased around twice as fast as in the euro area. This points to the role of structural factors. Key factors have been and still are the higher productivity of the information and communications sector in the United States and the comparatively lower innovation capacity of euro area firms. These differences are potentially linked to the smaller average size of firms in the euro area. Lower contributions from capital deepening and TFP in the euro area both contributed to the divergence. Measures to spur productive investment and lift TFP growth could support productivity over the medium term.^[7]