Skip to content

The Mismeasurement of European Productivity

Source: The Mismeasurement of European Productivity by Philippe Aghion, Antonin Bergeaud, and Luis Garicano

TL;DR

A technical rebuttal to Paul Krugman's argument that the US-Europe productivity gap is a measurement illusion. The core issue: using current PPP across time is statistically invalid — a PPP measures purchasing power across places at one moment, while a deflator compares prices across time in one place. IT accounts for 8% of US output but 45% of productivity growth, creating a massive measurement wedge. When a country produces goods whose prices fall rapidly (computers), valuing at current-PPP makes volume gains vanish. The "Seven Time Series" empirical proof shows the gap is real: US labour productivity growth ~1.93% vs France ~0.85% annually. The gap funds wages, welfare, rearmament, and the green transition — Europe should not persuade itself the problem is an illusion.

The Krugman Thesis

Paul Krugman recently argued that the widely reported US-Europe productivity gap is largely a statistical artefact — a measurement problem driven by how we account for the digital economy. If Europe has fewer tech giants but comparable living standards, perhaps the gap is in the data, not in reality.

Aghion, Bergeaud, and Garicano — three of Europe's leading economists — disagree sharply.

The Core Statistical Error

The authors identify a fundamental methodological mistake in Krugman's argument: using current PPP exchange rates to compare productivity across time.

  • PPP (Purchasing Power Parity) measures the relative price of a basket of goods across places at a single point in time.
  • A deflator measures price changes across time within a single place.

You cannot use a PPP as a time-series deflator. It is a category error. When you do, you introduce systematic bias — especially for economies with different industrial structures.

The IT Wedge

Here is the crux of the mismeasurement problem:

Metric Share
IT share of US output ~8%
IT contribution to US productivity growth ~45%

Information technology accounts for a tiny fraction of US output but nearly half of its productivity growth. This is because IT is a sector with rapidly falling prices — computers get faster and cheaper every year. When you measure output in nominal terms, IT is small. When you measure real output (adjusting for quality and price declines), IT is enormous.

Now apply the PPP error:

  • The US produces a lot of IT goods whose prices fall rapidly.
  • France produces fewer IT goods.
  • When you use a current-PPP deflator across time, you value US IT output at French-equivalent prices — which do not reflect the rapid price declines.
  • Result: the real volume gains from US IT production vanish from the statistics.

The gap is not an illusion; it is disguised by bad measurement.

The Seven Time Series Proof

To settle the question empirically, the authors examine seven independent time series for US and French labour productivity growth. Every single one tells the same story:

  • US labour productivity growth: ~1.93% per year
  • France labour productivity growth: ~0.85% per year
  • Gap: ~1.08 percentage points per year

This gap compounds. Over a decade, US productivity is roughly 11% higher than it would be at French growth rates. Over two decades, the difference is enormous.

Why It Matters

The authors are not engaged in academic turf warfare. The stakes are concrete:

The gap funds wages, welfare, rearmament, and the green transition — Europe should not persuade itself the problem is an illusion.

  • Wages: Higher productivity growth translates into higher real wage growth. The US worker's purchasing power is growing faster than the European worker's.
  • Welfare states: Europe's generous social models depend on productivity growth to remain fiscally sustainable. A 1% gap in productivity growth, compounded, makes the welfare state math increasingly difficult.
  • Rearmament: European defence spending relies on a productive economic base. A permanently slower-growing economy has less fiscal headroom for strategic investments.
  • Green transition: Decarbonisation requires massive capital investment. Productivity growth determines how easily a society can afford that investment.

What Europe Should Do

The authors do not just diagnose — they prescribe. Closing the productivity gap requires:

  1. Deepening the Single Market — especially in services and digital
  2. Increasing R&D spending — Europe invests significantly less than the US as a share of GDP
  3. Better technology diffusion — frontier firms in Europe are productive; the gap is in the laggards
  4. More competitive product markets — regulation often protects incumbents at the expense of dynamism

Key Takeaways

  1. The productivity gap is real — seven independent time series confirm it. The measurement illusion argument does not hold.
  2. The PPP error is fundamental — using cross-sectional PPP as a time-series deflator biases comparisons against countries with different industrial structures.
  3. IT is the wedge — 8% of US output drives 45% of productivity growth. Measuring IT properly is essential.
  4. The consequences are concrete — wages, welfare states, defence, and green investment all depend on closing the gap.
  5. Europe has policy options — deeper integration, more R&D, better diffusion, and market liberalisation are all within reach.