Goldman tries to explain U.S. productivity outperformance

Investing.com -- Goldman Sachs in a recent note said that the United States has significantly outpaced other advanced economies in productivity growth over the past three decades and examines the structural reasons behind the divergence.

Since 1995, U.S. labor productivity has grown at an average annual rate of 2.1%, more than twice the pace of other advanced economies, resulting in roughly a 50% cumulative gap, according to the brokerage.

Goldman Sachs attributes much of the lead to IT production and IT-intensive sectors such as professional services and finance and insurance.

Goldman Sachs estimates that about 0.55 percentage point of the annual U.S.-Euro area labor productivity gap reflects stronger capital deepening due to higher investment, while a 0.35-point annual difference comes from faster growth in total factor productivity, or TFP. U.S. TFP has averaged roughly 0.95% annual growth, compared with 0.6% in the Euro area.

The brokerage also says part of the gap is overstated due to measurement differences. U.S. price indexes for hardware and software have fallen more sharply than in Europe, likely reflecting larger quality adjustments by U.S. statistical agencies, which Goldman estimates added almost 0.1 percentage point to annual TFP growth since 1995. 

In addition, the brokerage says hours worked have been understated in U.S. productivity data, artificially lifting measured productivity by about 0.2 point per year since 2019. In combination, these issues account for slightly more than 0.1 point of the annual TFP gap, reducing the adjusted gap to around 0.25 point.

Goldman identifies four main structural drivers of the adjusted gap. The first is higher U.S. investment in intangible assets such as software and R&D, which contributed about 0.25 point per year to capital deepening from 1995 to 2019, compared with less than 0.1 point in the Euro area. Intangible spillovers further boosted U.S. TFP by 0.2 point annually versus 0.1 in Europe, explaining about 40% of the adjusted gap.

The second factor is more efficient allocation of labor and capital to productive firms. Misallocation reduces U.S. TFP growth to about 45% of potential and cuts Euro area growth to 30%; achieving U.S. efficiency levels would narrow the gap by about 0.1 point annually.

The third is management quality. Research cited in the note shows management practices account for more than 20% of productivity variation among U.S. firms, and aligning Euro area practices with U.S. standards would close 5%–10% of the gap, or roughly 0.02 point per year.

The fourth factor is firm size. U.S. firms are larger across their life cycle, and productivity growth at large companies has been about twice as strong as at small businesses since 2007. Goldman partially attributes the remaining 0.03-point unexplained gap to scale effects and productivity spillovers from “superstar” firms.