The productivity gap dividing advanced economies

Productivity is one of the most powerful forces in an economy, even if its effects accumulate gradually. When workers produce more in each hour, businesses can raise wages without necessarily raising prices, governments collect more revenue and economies can improve living standards without relying solely on a larger workforce.

Across much of the developed world, however, that engine has been losing momentum. Median annual labor productivity growth across OECD countries fell from 2% between 2001 and 2007 to 1% between 2008 and 2019 and 0.8% between 2020 and 2024, according to the OECD Compendium of Productivity Indicators 2026. Had the pace recorded before the global financial crisis continued, GDP per hour worked across the major OECD economies would have been approximately 10% to 12% higher in 2024.

Over time, that slowdown translates into less output, income and fiscal capacity, particularly as aging populations constrain workforce growth.

Two decades of lost momentum

The productivity slowdown is not simply a consequence of the pandemic or the inflation and energy shocks that followed it. Its roots extend back nearly two decades.

Productivity measures how efficiently an economy turns inputs such as labor and capital into output. Labor productivity, commonly measured as GDP produced per hour worked, can rise when workers have better equipment, businesses adopt new technologies or companies find more efficient ways to organize production.

Across OECD economies, those improvements have become harder to achieve. Multifactor productivity, which measures gains beyond simply adding labor and capital, shows the deterioration clearly. Average growth across 21 countries fell from about 1.5% in 2000-07 to 0.8% in 2010-19 and negative 0.3% in 2023-24, according to the OECD.

The consequences extend beyond wealthy economies. An International Monetary Fund analysis published in 2024 found that productivity growth accounted for more than half of the decline in global economic growth. In emerging markets, annual productivity growth fell from 2.5% in 2001-07 to 0.8% after the pandemic, while in low-income countries it declined from 2% to nearly zero.

Why some economies are pulling ahead

The slowdown has not produced a uniform decline, and the widening gaps among countries offer clues about what may be going wrong.

According to the OECD report, U.S. output per hour worked rose from $50.80 in 1995 to $84.10 in 2024 in constant 2020 purchasing power parity terms, equivalent to average annual growth of 1.8%. The EU and Japan both averaged 1.1%. As those relatively small differences compounded, EU productivity slipped from about 90% of the U.S. level in 2000 to 75% in 2024, while Japan fell from 73% to 62%.

Yet the story is not simply one of American outperformance. Poland and South Korea have recorded substantial productivity gains over the past three decades, while Poland, Denmark and Bulgaria were among the strongest performers in the OECD's latest comparisons. 

The divergence suggests that access to technology alone is insufficient. The IMF points to what economists call “allocative efficiency,” or an economy's ability to direct workers and capital toward their most productive uses. Its analysis estimated that if less efficient economies closed just 15% of their efficiency gap with the United States, the resulting productivity and investment gains could add about 1.2 percentage points to annual global growth.

Investment is only part of the answer

New technology raises productivity only when companies can afford to adopt it and workers can use it effectively.

Investment across OECD economies has yet to recover fully from its longer-term decline. Spending on buildings, machinery and other assets amounted to 22.6% of GDP in 2024, down from 23% in 2023 and below pre-financial crisis levels. Digital investment, however, has risen in 27 of 35 countries, led by Sweden, Switzerland and Japan.

Those investments have not produced equal returns. Productivity differences among countries are particularly pronounced in digitally intensive industries, while small and medium-sized businesses averaged just 65% of large-company labor productivity in 2024.

Europe provides one prominent example of the difficulty. The Future of European Competitiveness, Mario Draghi's 2024 report for the European Commission, concluded that much of the EU's productivity gap with the United States could be traced to technology. Just four of the world's 50 largest technology companies were European when the report was published.

Can AI break the slowdown?

The latest productivity figures offer tentative evidence that the long decline may not be permanent.

Labor productivity grew 1.2% across the OECD in 2024, twice the previous year's pace, with gains recorded in 29 countries. Preliminary estimates indicate that productivity also increased across most OECD economies in 2025, including an acceleration in the EU from 0.2% growth in 2024 to 1.4%.

Artificial intelligence could strengthen that recovery, although the scale and timing remain uncertain. Industries where AI adoption is particularly prevalent recorded the strongest multifactor productivity growth in 2024, according to the OECD. Yet businesses still need investments in training, management and infrastructure to translate new technologies into economy-wide gains.

After two decades in which technological advances failed to prevent the slowdown, AI offers another opportunity to accelerate growth. The question is not only how powerful the technology becomes, but which economies can turn it into higher output, wages and living standards.