For most of the second half of the 20th century, France and Germany progressively narrowed their labor productivity gap with the United States. That changed in the 1990s, however, as US productivity growth pushed ahead and growth in Europe slowed. By 2000, its labor productivity gap with the United States had widened again, to 5 percent for France and to 15 percent for Germany (Exhibit 1).¹

One cause is clear: both France and Germany have smaller IT-manufacturing sectors than does the United States, where IT generates 2.3 percent of GDP. US productivity in this sector—which benefited from more powerful and easily assembled computers, from advances in microchips, and from a spike in demand—rose sharply in the late 1990s. Indeed, studies show that the sector accounted for about a quarter of the annual US productivity growth during this period. Meanwhile, in France and Germany, where IT manufacturing generated only 1.3 and 1.5 percent of GDP, respectively, the sector contributed less than a fifth of total productivity growth. But this difference explains only a third of the gap in productivity growth between the two European countries and the United States since the mid-1990s.

Many observers blame the remaining gap on...