Europe Versus America: A Response to the Critics
Paul Krugman
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Europe Versus America: A Response to the Critics<br>The puzzle is real, even if you don’t like my explanation
Paul Krugman<br>May 30, 2026
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A note for most readers: This is inside economics baseball football, a discussion mostly among professionals — and covers issues that even economists seem to be perplexed by. You have been warned.<br>Phillipe Aghion, Antonin Bergeaud and Luis Garicano have written a response to my discussions of the Europe/US productivity gap. I respect their standing as serious analysts, who have produced a body of valuable work.<br>Yet I found their article baffling, because their arguments appear to rest on the same confusion about the implications of different national productivity trends that I am trying to clarify. In fact, their apparent confusion about the point that I am making – that people often misunderstand what productivity trends mean for cross-country comparisons -- is reflected in the very title of their article, The Mismeasurement of Europe’s Productivity.<br>Let me be clear: I am not arguing that European productivity is mismeasured, and never said that. I am, instead, arguing that standard measures of productivity do not have the implications for cross-country comparisons of living standards and economic welfare that many people – including many economists – think they have. To put it a slightly different way: people are using data that is unsuited for the kinds of comparisons that they are trying to make. Thus, the conclusions that they are drawing from the data are misguided. But this is not to say that the data are wrong.<br>The apparent misunderstanding by Aghion et al of what I am trying to say is also reflected in their discussion. Their presentation mostly centers on arguing that European productivity growth is in fact lower than US productivity growth. This is puzzling, because I am not arguing that European productivity growth matches or exceeds US productivity growth. Like Aghion et al, I am fully aware that European productivity growth is lower than in the U.S. But this is not the actual issue that I am trying to address. My question is whether the standard comparison of European and US productivity growth rates is a good indicator of what is actually going on in the two economies over time.<br>From my viewpoint, the starting point for the debate on the relative performance of the EU and the US should be the acknowledgment that a comparison of US-Europe productivity trends looks very different if you use two different metrics.<br>One method is to compare the growth in inflation-adjusted GDP per hour within countries. This is a standard way to make cross-country comparisons, but one that answers the wrong question. The other method is to compare the year-by-year value of output per worker-hour, adjusted for differences in national price levels to control for exchange rate instability, but not for changing price levels over time. This measure is, I would argue, much more meaningful for comparing trends in economic welfare across countries.<br>You might think, and I suspect that many observers have assumed, that these two approaches tell similar stories. But they don’t.<br>I’ve been in the Netherlands recently, looking at Dutch data. As a high-productivity nation with much lower measured productivity growth at constant prices than the US, the Netherlands, it turns out, offer a kind of reductio ad absurdum for many US-EU comparisons. So I’ll initially focus on Dutch data to make my point, although the basic story applies to much of the EU.<br>Let’s look at OECD estimates of GDP per worker-hour in the US and NL, adjusting the data two ways. The first (the blue line) looks at the ratio of NL to US productivity year by year at current prices, adjusted only for purchasing power parity. By this measure, Dutch productivity is slightly higher than US productivity now, probably because of the presence of highly capital-intensive industries associated with the port of Rotterdam. NL productivity was also slightly higher in 2000, with no significant trend:
Suppose, however, that we measure GDP and hence productivity growth adjusting for national inflation rates (the black line). The OECD uses 2020 as a base year, so the two measures of relative productivity are equal in that year. But as we move back in time, they diverge. By this measure, Dutch productivity was 25 percent higher than US productivity in 2000.<br>Was the Netherlands drastically richer and more productive than America a generation ago? I doubt that many people would agree with that proposition. It’s certainly not what people believed at the time.<br>But if you find this proposition implausible, you must also concede that the conventional understanding of the implications of differing productivity growth in Europe and the US is highly problematic. If we want to compare relative economic welfare in two countries over time, surely we want...