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Goldman Sachs reports that the United States has dramatically outpaced other advanced economies in labor productivity growth over the past three decades, driven largely by technology investment, innovation, and more efficient resource allocation. According to the firm, U.S. labor productivity has increased at an average annual rate of 2.1% since 1995—more than double the pace of other advanced economies—creating a cumulative gap of about 50%.
A significant share of the U.S. advantage comes from strong performance in IT production and IT-intensive sectors such as professional services, finance, and insurance. Goldman estimates that roughly 0.55 percentage point of the annual U.S.–Euro area productivity gap stems from stronger capital deepening fueled by higher investment levels. Another 0.35 percentage point reflects faster total factor productivity (TFP) growth, with U.S. TFP averaging 0.95% annually compared with 0.6% in the Euro area.
However, the brokerage notes that part of the gap is inflated by measurement differences. Sharper declines in U.S. price indexes for hardware and software—due to more aggressive quality adjustments—have added about 0.1 percentage point to annual TFP since 1995. Additionally, U.S. hours worked have been understated since 2019, artificially lifting productivity by around 0.2 point per year. Adjusting for these factors narrows the TFP gap to approximately 0.25 point.
Goldman highlights four structural forces behind the adjusted gap. First, the U.S. invests more heavily in intangible assets such as software, data, and R&D, contributing significantly to capital deepening and TFP gains. Second, American firms benefit from more efficient labor and capital allocation, and closing this gap would boost Euro area productivity by about 0.1 point annually. Third, superior management practices account for over 20% of productivity differences and could close another small share of the gap. Lastly, larger U.S. firm sizes and scale advantages—especially among “superstar” companies—contribute roughly 0.03 point to the remaining unexplained difference.
These structural advantages reinforce why the U.S. continues to lead global productivity growth, driven by innovation, technology adoption, and competitive scale effects.
