Mid-Tech Europe? A Sectoral Account on Total Factor Productivity Growth from the Latest Vintage of the EU-KLEMs Database

This paper uncovers patterns of TFP growth in the EU compared with the US using the latest vintage of the EU-KLEMS database which accounts better for intangible capital in production. Both in the EU and the US the growth contribution of TFP has been declining over the past two decades, while that of intangible capital and labour composition has been growing since the Global Financial Crisis (GFC) recovery. Most TFP growth can be attributed to a relatively few industries. The TFP growth advantage of the US over the EU is linked both to higher TFP growth rates in the sectors generating large TFP gains and to larger shares in value added for these sectors. Over the 2013-2019 period, in both the EU and the US, TFP growth is mostly due to TFP growth in services. While in the EU several so-called mid-tech manufacturing sectors, provided a positive contribution to overall TFP growth, in the US the only manufacturing sector that did so is not mid-tech: manufacturing of computers and electronics. Despite an acceleration of intangible capital investment in the EU, dynamics remain slower as compared with those observed in the US. Econometric estimations show that the elasticity of TFP to intangible capital has dropped considerably since the post GFC recovery, suggesting a possible slowdown of technological diffusion. Overall, even though sectors which are expanding their share in value added in the EU are generally those exhibiting higher and accelerating TFP growth, it appears that in the EU the transition towards the services sectors, where TFP is growing the fastest, is slower compared with the US.