IT in the European Union: driving productivity divergence?

This paper analyses the contributions of IT-capital deepening and total factor productivity growth (TFP) in IT-production on aggregate labour productivity growth patterns within the European Union in comparison with the US. We find that differences in the direct effects of IT almost fully explain the US lead in labour productivity growth over the EU aggregate over the period 1995-2001. However differences in the direct effects of IT are by no means the sole determinants of the widening of the "Atlantic Divide", neither the main cause of divergent labour productivity growth patterns within Europe. Non-IT capital deepening and non-IT TFP growth were major contributors to continued or even accelerating growth in small economies such as Austria, Finland, Greece, Ireland, Portugal and Sweden. In Finland, Sweden and especially Ireland this was augmented by high contributions from IT, which were even higher than in the US. At the same time, decelerating labour productivity growth in major European countries such as France, Germany, Italy and the UK was mainly due to declining contributions of non-IT capital deepening and non-IT TFP growth compared to the period 1980-1995.