Goldman Sachs has attempted to explain why labor productivity in the United States has been growing significantly faster than in other developed economies for the past three decades. According to the bank, US productivity has increased by an average of 2.1% annually since 1995—more than twice the rate of comparable countries—resulting in a gap of approximately 50%.
The bank estimates that a large portion of the US advantage is tied to the expansion of the IT sector and industries that actively use digital technologies, ranging from finance and insurance to professional services. About 0.55 percentage points of the annual productivity gap with the euro area can be attributed to faster capital deepening resulting from high investment levels, while another 0.35 points stem from stronger total factor productivity growth. TFP has grown by an average of 0.95% per year in the US, compared to around 0.6% in the eurozone.
However, Goldman Sachs acknowledges that part of the gap appears larger on paper than it is in reality. US price indices for equipment and software have declined more rapidly than those in Europe, likely due to more aggressive quality adjustments. This could have added around 0.1 points to annual TFP growth since 1995. Additionally, analysts believe that data on hours worked in the US has been underestimated, artificially inflating productivity by approximately 0.2 points annually since 2019. Consequently, about 0.1 points of the “extra” annual gap are attributed to statistical factors, reducing the adjusted difference to approximately 0.25 points.
The bank identifies four structural factors that contribute to this adjusted gap. First, the US invests significantly more in intangible assets, such as software, research and development, and other forms of intellectual capital. This adds about 0.25 points to annual growth, compared to less than 0.1 points in the eurozone. The positive externalities from these intangibles also accelerate US TFP nearly twice as strongly as in Europe, accounting for approximately 40% of the difference.
Second, a more efficient allocation of labor and capital in the US reduces productivity losses. Goldman Sachs estimates that allocation inefficiencies in the eurozone hinder growth more heavily. Addressing these imbalances could narrow the gap by another 0.1 points per year.
The third factor is management quality. Research indicates that management practices account for over 20% of the differences in productivity among American firms. Aligning European corporate management practices with American standards could close an additional 5-10% of the gap, or about 0.02 points annually.
Finally, the size of businesses plays a crucial role. American firms are larger on average at each stage of their lifecycle, and productivity growth in major companies has been twice that of smaller ones since 2007. Goldman Sachs believes that the remaining unexplained gap of approximately 0.03 points is due to scale effects and the upward skewing of statistics by “superstar” companies.
