Why is the US outgrowing Europe?

The US economy has been growing faster than many other countries for some time now.

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Dr. Jörg Krämer, Bernd Weidensteiner

Commerzbank Economic Research

May 10 2024

We investigate why this is the case and whether it will continue.

The US economy outperforms, ...

The US has emerged from the coronavirus crisis better than many other advanced economies. Unlike most euro countries, it has returned to the growth trend that prevailed before the crisis. In the short term, this better development can be explained by differences in monetary or fiscal policy and the fact that the US was less affected by the energy price shock following the Russian invasion of Ukraine.

However, there are also clear long-term differences. For example, the US economy has expanded on average around one percentage point per year faster than the eurozone economy in recent decades. This suggests that the USA has structural advantages.

... because Americans work longer, ...

Since the output of an economy depends on how much work is done and how productive that work is, we examine these two factors. In fact, the US has two advantages when it comes to labor input. Firstly, this is the more favorable demographic trend. For example, the working-age population in the USA (15 - 64 years) increased by 0.9% per year between 1995 and 2019, while it only rose by 0.1% in the eurozone and even shrank slightly in Germany. The decisive factor for the better development in the US was more immigration and a higher birth rate; projections suggest that this advantage will not change fundamentally in the coming years either.

A second advantage of the US is that the trend towards shorter working hours is not as pronounced there as in Europe. Although Americans worked fewer hours in 2019 than in 1995 in terms of the average number of hours worked per year, the decline of 3.4% was significantly less than in the eurozone (-6.7%) or Germany (-10.3%).

Ultimately, however, labor input only explains around a quarter of the US growth advantage of 0.9 percentage points over the eurozone. More important was the significantly larger increase in productivity, i.e. output per hour worked, of 0.7 percentage points.

For full text see attached PDF-Version.