Europe Wants to Fix Its Widening Productivity Gap With the US

In at least one regard, Europeans wish they were a little more like Americans. 

Over the past quarter century (give or take) the US has pulled ahead of Europe in terms of economic productivity. This is a worry for Europeans who don’t want to see their economies falter and fall behind even more, and some are calling for government intervention.

Work, Work, Work

Productivity (the labor kind) is a standard measure of how much work it takes your economy to produce what it produces. If a country’s GDP can grow faster than wages, its economy is on the right track. That isn’t happening at all in Europe. 

Despite a recent hiccup amid annoying inflation and high interest rates, the US economy has continued to grow efficiently — productivity has grown 60%, with a 10% rise in hours worked since 2000, according to the Bureau of Labor Statistics. And in quite possibly the cutest description ever, the BLS said “this efficiency in production means more time for fun activities like an afternoon baseball game with friends.” 

Right now, Europe wishes it had more time for “footie”:

• European productivity has increased only about 20% since 2000, and Erik Thedéen — governor of Sweden’s central bank — told the Financial Times that “the productivity growth in the US has been much stronger. That is very important for European policymakers to try to address.”
• Nicolai Tangen, head of Norway’s $1.6 trillion oil fund, told the FT that all of this was because Europe as a whole was less ambitious, less hard-working, and more risk-averse than the US (he said it, not us!) Improved productivity helps keep wages up, which in turn keeps workers happy and loyal.

But the story isn’t really about work ethic. Like most economic issues, it comes down to policy. For example, as the world shifts from fossil fuels to renewable energies, dozens of industrial companies have urged the European Union to make energy cheaper, cut red tape, and boost clean tech funding to stay competitive with the US and China, Bloomberg reported. Meanwhile, the Biden administration’s Inflation Reduction Act underwrote roughly $370 billion for climate change programs.

Coming in for a Landing: In the fourth quarter of 2023, productivity rose 3.5% according to the BLS. But it grew just 0.3% in this year’s first quarter, which is either an aberration or a warning that jobs and wages are starting to slow. Last week, jobless claims increased 22,000 to 231,000, the highest level in eight months. The Fed’s “soft landing” scenario is still alive and well, but perhaps not as certain as it looked last week.