Understanding the EU-US labour productivity gap #2 – A granular analysis

Published: 30 October 2025

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

This study provides a detailed analysis of the European Union’s (EU) labour productivity growth and its persistent gap with that of the United States (US). The analysis is set against a backdrop of a well-documented economic divergence between the EU and the US, a phenomenon highlighted in recent reports such as those by Draghi and Letta. This divergence has significant implications for Europe’s economic model and its ability to fund its social system and address collective challenges, from living standards and wages to social welfare and future investments.

Our previous study established a long-term decline in EU productivity relative to that of the US. The analysis also revealed that the EU’s productivity lag is a broad-based phenomenon affecting most major sectors and has accelerated since the COVID-19 pandemic.

This second study is motivated by the need for a more granular perspective, acknowledging the EU’s unique characteristics, notably the high degree of heterogeneity among its member states in terms of productivity levels and sectoral structures. This analysis confirms that the overall EU performance is a complex aggregate of disparate national and sectoral dynamics.

We found that while a partial convergence of productivity levels and hours-worked structures has occurred among EU countries since 1995, the productivity gap with the US has simultaneously widened.

The decline in the overall EU-US productivity ratio is almost entirely attributable to lower productivity growth in individual EU countries relative to the US, while shifts in hours worked between more and less productive EU countries had a beneficial effect.

A country-by-country breakdown reveals that the aggregate EU lag is primarily driven by the core EU economies (Germany, France, Italy, Spain, Belgium and the Netherlands), despite their significant positive contribution to the EU-27 productivity growth. These countries are the largest negative contributors to the overall EU-US productivity ratio, offsetting the positive contributions from new member states and Ireland.

Furthermore, a decomposition of productivity growth by factor reveals that the lag of the core EU countries is rooted in different sources. While Germany and France maintained a total factor productivity (TFP) growth rate similar to that of the US between 1995 and 2019, their lag is mostly due to insufficient investment, particularly in intangible capital and ICT. In contrast, countries like Italy and Spain experienced a significant lag in TFP itself, accounting for the majority of their productivity growth gap with the US. The lag in ICT investment and TFP is particularly acute in sectors like information and communication, where the US has a productivity level significantly higher than the EU at the end of the period.