Cumulative GDP growth from 2010 to 2023 reached 34% in the United States, but only 21% in the European Union and 18% in the Eurozone. This measure of GDP volume is independent of exchange rate fluctuations. Over the same period, labor productivity increased by 22% in the US and 5% in the euro area. Therefore, the gap between Europe and the United States has been evident since the early 2010s and cannot be explained by differences in the growth of the working-age population.
Most of this difference is due to differences in productivity gains. And this gap still exists even recently (over the four quarters to 2023, labor productivity rose by 1.7% in the US, but fell by 0.6% in the euro area). Understanding the reasons for this difference between the United States and Europe is an important area of research, but there is disagreement about it.
For some, the euro area's productivity stagnation and subsequent decline is thought to be due to the high level of employment difficulties that began to emerge in 2017 at the same time as the productivity stagnation. Due to the employment crisis, companies would not have cut staff even if there was an oversupply of talent. However, it is difficult to believe this theory, as the United States has not seen any stagnation in productivity and is experiencing very severe employment difficulties.
Some believe that the stagnation and subsequent decline in productivity in Europe is due to rising employment rates among the least qualified. As a result, the average skill level of the working population will decline. However, this argument is unconvincing, as employment rates in Europe have risen about the same across all skill levels, and the average skill level of those working has not fallen.
Two factual explanations related to Europe's declining labor productivity levels are insufficient investment in new technologies (computers, artificial intelligence, software, etc.) and low levels of spending on research and development. It is to be.
Comparing OECD countries, we find that these two variables have a strong influence on differences in productivity between countries. Econometric estimation has the following effects: A 1 percentage point increase in the rate of investment in new technology increases productivity by 0.8 percentage points per year. Similarly, a 1 percentage point increase in GDP in R&D spending increases productivity by 0.9 percentage points per year.
The fear is that Europe will fall into a vicious cycle.
By 2022, investment in new technologies is expected to reach 5% of GDP in the US and 2.8% of GDP in the euro area. R&D spending in 2022 is expected to reach 3.5% of GDP in the US and 2.3% of GDP in the euro area. Furthermore, from 2016 to 2017, investment and R&D efforts in the United States increased significantly compared to the euro area. At the same time, productivity began to increase in the United States much faster than in Europe. Therefore, a large part of why Europe lags behind the United States in terms of labor productivity and GDP is due to a lack of technology investment and research and development.
How can Europe catch up with the United States in terms of productivity and growth? The first step would be to change the nature of business investment. As of early 2024, the share of business investment in the US and the euro area is virtually the same (13.5% of GDP), but the share of investment in technology is much higher in the US (5% of GDP). % compared to 2.8% in the euro area). There is therefore a need to correct the fact that corporate investment in the euro area is too routine and not luxurious enough.
The second measure is to increase research and development spending and university budgets in the euro area. There are far more resources available for university and corporate research in the United States. And, as mentioned earlier, these resources are key factors in determining productivity gains.
There are concerns that Europe will be stuck in a vicious cycle of low investment in new technology and research and development, resulting in low productivity gains and low growth. First, such a decline could have a negative impact on Europe's attractiveness for foreign investors. Second, tax revenues could fall, reducing the ability of European governments to pursue policies that support innovation and make Europe more attractive.
