New Study Reveals Persistent EU-US Productivity Gap, Calls for Increased Innovation Investmen

The European Employers’ Institute (EEI) has released a study revealing a persistent labour productivity gap between the EU and the US, driven by underinvestment in innovation and digitalization in core EU economies.

As reported by HOTREC, an umbrella association representing the hospitality sector in Europe, the European Employers’ Institute (EEI) conducted a comprehensive analysis through Rexecode to explore the labour productivity gap between the European Union (EU) and the United States (US) from 1995 to 2019. This research provides a detailed examination at both the country and sector levels, aiming to understand the underlying causes of Europe’s lagging productivity and its implications for competitiveness and growth.

Key Findings on Productivity Dynamics

The study pinpoints the major EU economies—Germany, France, Italy, Spain, Belgium, and the Netherlands—as the primary contributors to the slower productivity growth in the EU compared to the US. Despite their significant roles in the European economy, these countries have not matched the productivity advancements seen in the US.

Conversely, newer EU Member States in Central and Eastern Europe showed faster productivity growth rates than the US during the same period. However, their progress has not been enough to bridge the gap created by the larger EU economies.

Investment and Structural Challenges

A critical issue identified in the study is the underinvestment in innovation, digitalization, and intangible assets across core EU countries. In Germany and France, while total factor productivity (TFP) growth was comparable to that of the US, the lack of substantial investment in Information and Communication Technology (ICT) and intangible capital has hindered further advancements.

In Italy and Spain, the productivity gap is exacerbated by deeper structural issues, including poor innovation diffusion and organizational inefficiencies. These issues are particularly acute in sectors like ICT, professional services, and manufacturing.

Evolution of the Productivity Gap

The report details the widening of the EU-US productivity gap over time. Before 2007, the gap grew by approximately 1 percentage point per year, primarily in manufacturing and services. From 2007 to 2019, productivity growth slowed in both regions; however, the US gained a significant lead, particularly in ICT. Following 2019, the gap has widened further, particularly in ICT and business services.

Implications for Policy and European Competitiveness

The findings underscore the necessity for Europe to enhance its investment in innovation, digitalization, and skills development to boost productivity and strengthen its industrial and service sectors. This aligns with concerns previously highlighted in the Draghi and Letta reports regarding Europe’s ability to sustain its social model, improve living standards, and finance future investments.

The study serves as a crucial resource for policymakers and business leaders, providing insights that could help shape strategies for a more competitive and resilient European economy.

Download the full study here