Productivity Has Been Growing Faster in the U.S. Than in Europe for 20 Years. It's a Story of Two Parallel Realities With Many Nuances

Productivity is a term that’s easy to understand at a basic level, but it becomes more complicated when we talk about it in macroeconomic terms, especially when comparing countries with different economic and labor policies, such as the U.S. and Europe.

Both regions must compete on the global economic stage, inevitably leading to comparisons. Comparatively, the U.S. has been winning the productivity battle for 20 years, while Europe has been unable to close the gap. It leads to many questions, including those on why this difference exists and how the U.S. has managed to maintain its productivity trend while Europe is struggling to keep up.

Productivity per hour worked simply means producing more in less time. Productivity per hour is a concept relatively easy to understand. In short, it’s calculated by dividing the number of items produced by the number of hours worked.

For example, if an employee produces 10,000 screws in an 8-hour day, their productivity is 1,250 screws per hour. If the same employee produces the same amount of screws in 6 hours, their productivity increases to 1,666.6 screws per hour, indicating increased productivity. However, if the employee produces only 8,000 screws in 8 hours, their productivity drops to 1,000 screws per hour, making them less competitive.

When discussing countries, the issue becomes more complex. When we talk about productivity in macroeconomic terms, things get complicated. Productivity is calculated using the GDP (gross domestic product) indicator, which depends on various factors. It’s not just about the number of screws a worker can produce, but also the efficiency of the manufacturing machine, the number of shifts in the factory, and even the cost of energy required for production.

Fiscal policies, labor market policies, and exchange rate differences between the euro and the dollar also play a significant role. The delicate balance of these factors has favored the U.S. over Europe for the past two decades.

A study by Spanish financial services company CaixaBank compares the productivity per hour worked in the eurozone, the UK, and the U.S. over the last 20 years. The study illustrates the U.S.’ growth trend compared to Europe and the substantial gap that has emerged between the two regions. Since 2019, productivity in the U.S. has grown by over 8.4%, while in the eurozone, it’s only grown by 1%, as indicated by the BBVA Foundation.

Do people in the U.S. work more? The common belief that people in the U.S. work longer hours isn’t the sole reason for this disparity, although it’s true that working hours in the U.S. are longer. According to data from 2022 from the Organization for Economic Co-operation and Development (OECD), the average annual hours worked in the U.S. is 1,810 hours in the U.S, compared to 1,570 in Europe.

Several other factors contribute to this difference, such as the aging European population and more protectionist labor policies in Europe, as opposed to a less regulated labor market in the U.S. These differences in labor policies were especially noticeable during the pandemic and post-pandemic, with Europe offering more financial support to employees.

Investment in better machines. Going back to the screw factory example, a country’s overall productivity heavily depends on the technology it utilizes for production. In this regard, it’s crucial for a country to invest in advanced machinery to improve productivity.

The Financial Times analyzed productivity growth across various sectors to pinpoint the primary driver of the increase. Surprisingly, according to the outlet, the most significant improvements in productivity per employee—not per hour— were in the professional and service sectors, communication sciences, education, and healthcare, rather than in the manufacturing industry.

U.S. industries have improved in making the most out of their time. In the U.S., the sectors that have improved productivity more significantly are those that use new technologies, offer remote work, and work with AI applications. The use of technology, in fact, has greatly enhanced employee productivity, making each hour of the workday more effective.

This is largely due to the U.S.' substantial investment and technological development, surpassing that of Europe. As a result, the U.S. is able to incorporate more labor into these sectors, leading to an overall increase in productivity.

Europe faces an additional challenge: energy. The continent is now reeling from two decades of declining technological investment. Furthermore, European economies have had to cope with the significant economic costs stemming from the war in Ukraine and the resulting energy crisis. Although the European Union utilizes more renewable energy than the U.S., its industrial energy costs are higher.

These cost pressures directly impact each country’s GDP, which in turn affects productivity calculations. In essence, it’s a delicate balance where even the smallest change can have far-reaching consequences.

Productivity is measured in dollars. However, there’s an important factor to consider: The GDP of the U.S. is measured in dollars, while in Europe, it's measured in euros. In 2000, €1 was worth $0.92, but by 2008, it was worth $1.48. Does this mean the European economy grew almost twice as fast then? No, it certainly doesn’t.

However, the currency exchange rate can create the impression that the European economy grew faster when converting the data. In 2022, the exchange rate was $1.05 per euro. Comparing this to 2008, it appears that Europe’s GDP fell significantly due to the euro’s depreciation in that period, negatively impacting the GDP figures for the eurozone. The Bank of Spain notes that this exchange rate difference also affects business activity and, in turn, the calculation of productivity, skewing the European calculation.

Image | Waldemar| Joshua Hoehne | Spencer Davis

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