Understanding the EU-US labour productivity gap #1 – The broad perspective

Published: 15 September 2025 (Revised version: 26 November 2025)

Author: Olivier Redoulès, Economist and director of studies at Rexecode, Paris

The current economic landscape is marked by significant concerns regarding Europe’s economic performance. Recent influential reports, notably the Draghi Report and the Letta Report, both published in 2024, along with other analytical works, highlight a growing economic divergence between Europe and the United States (US). Furthermore, shifts in global trade dynamics, including past trade tensions and the ongoing fragmentation of global exchanges, fundamentally challenge Europe’s traditional export-dependent economic model. This study provides an updated assessment of the labour productivity gap between the United States and the European Union (EU), along with an overview of the explanatory factors identified by economic research.

Overall, economy-wide hourly labour productivity has grown by an average of 1.7% per year in the US over the past 25 years, compared to 1% in the EU. Starting from a lower level in the mid-1990s (a -27% gap), EU real labour productivity in 2020 prices is 38 % below that of the US in 2024. Across all economic sectors (with the exception of non-market services), US productivity is significantly higher than in the EU, both in nominal terms and in PPP dollars, i.e., after adjusting for relative prices.

The persistence of this productivity lag poses major challenges for the European economy and society, given the key role of labour productivity growth for the progression of national income.

This weakness impacts critical areas such as living standards, wage growth, the financing of the social model, and Europe’s capacity to effectively address collective challenges (e.g., climate change, defence, digitalisation, demographic shifts).

Our review of academic literature identifies eleven complementary explanatory factors for the decline in EU productivity relative to the US: differences in Information and communications technology (ICT) Investment and use, fragmentation of the European internal market, lower R&D investment, weaker business dynamism, firm size distribution, limited access to financing, digital infrastructure and bottlenecks, differences in labour market functioning and social model, administrative complexity and regulatory burden, human capital and skills mismatch, and macroeconomic policies and demand-side factors.