Europe Is Not Misunderstood. It Is Underperforming
A response to Gabriel Zucman’s Claims
French economist Gabriel Zucman argues that the growing consensus about European “eurosclerosis” is based on a statistical mistake. Compare GDP per capita in nominal dollars, he says, and Europe looks poor only because the cost of living is higher in the United States. Adjust for prices, and the supposed gap largely disappears. Over the past three decades, U.S. and European GDP per capita have grown at nearly the same rate, and the remaining income gap reflects Europeans choosing to work fewer hours rather than chase maximum productivity.
This claim doesn’t quite reflect what the actual data show. As the figure below demonstrates, even if we use purchasing power parities (PPP) to account for differences in the cost of living, output per worker in the U.S. is still 28% higher than in the EU.
Taking this analysis one step further, correcting prices does not correct for economic structure. PPP converts currencies; it does not neutralize the effects of taxes, regulation, labor market institutions, or capital allocation. Once these factors are taken into consideration, the story Zucman tells completely collapses.
Consider first the growth comparison. Zucman emphasizes that since 1990, GDP per capita has grown at roughly 1.6% annually in the United States and 1.5% in the European Union. Presented in this way, the numbers suggest parity. But this interpretation ignores the most basic implication of convergence theory. Europe entered the 1990s substantially poorer than the United States following the admission of poorer Southern European countries in the 1980s and Germany’s reunification in 1990. If institutions and incentives were broadly comparable, Europe should have grown faster, not at the same pace. Similar growth rates over more than three decades imply failed convergence, not success.
Moreover, averaging GDP per capita over the entire post-1990 period obscures where the divergence actually occurred. The gap between the U.S. and Europe widens most sharply after 2000, and especially after 2010, precisely when digital technologies, intangible capital, and firm scaling became central to economic growth. Failing to account for compounding growth during the most technologically dynamic period of modern history is economically decisive.
Zucman’s core claim is that the large remaining gap in GDP per capita, on the order of 35 to 40%, is mostly explained by Europeans working fewer hours than Americans. This is where the argument becomes analytically unsound. Economist Ernie Tedeschi points out that, even if you adjust for hours worked, U.S. real GDP per hour was still 22% higher than the EU in 2023.
What’s more, the number of hours worked is not an exogenous lifestyle choice floating free of policy. It is an endogenous response to marginal tax rates, benefit systems, stringent labor laws, early retirement rules, and disability insurance. When institutions systematically discourage work at the margin, lower labor input is not a neutral preference. It is a policy-induced reduction in output. This helps explain why the unemployment rate in the Euro Area has averaged 3 to 4 percentage points higher than that of the United States since 1990 (see the figure below).
Describing this outcome as “choosing leisure” does not make it economically irrelevant. An economy that taxes work heavily, subsidizes non-work generously, and regulates hiring strictly will indeed end up with fewer hours worked. That is not a rebuttal to underperformance, it is a description of its mechanism.
Zucman then turns to output per hour worked, arguing that once productivity is measured correctly, core European countries look essentially as productive as the United States. This comparison is deeply misleading. European labor markets exclude far more marginal workers than the U.S. labor market does. In many European countries, low-skill workers, young workers, and the long-term unemployed are disproportionately pushed out of employment altogether. This exclusion mechanically inflates measured output per hour among those who remain employed.
The United States, by contrast, employs many more marginal workers. That policy lowers average output per hour while raising total employment, total output, and aggregate income. A system that employs fewer people will often appear “more productive per worker” precisely because it excludes the least productive. Output per hour, taken in isolation, is therefore a biased measure of underlying economic performance.
More importantly, the real U.S.–Europe gap is not about hours or even worker-level productivity. It is about firm dynamics and capital allocation. The United States exhibits faster firm entry and exit, stronger reallocation toward high-productivity firms, greater accumulation of intangible capital, and far more successful scaling of frontier companies. These differences show up in total factor productivity (TFP) and long-run growth, not in stylized hourly averages. Total factor productivity has increased by more than 20% in the United States since 1990. By comparison, TFP growth in major European economies has been weak or negative, increasing only marginally in France and declining substantially in Spain and Italy. Zucman does not engage with this literature at all.
Firm dynamics and capital allocation also matter for innovation. In 2025 alone, roughly 74 U.S. enterprises crossed the $1 billion valuation threshold to become unicorn companies, compared with only about 10 in the entire European Union. This is not a matter of hype or financial froth. Unicorn formation is a proxy for an economy’s ability to generate, finance, and scale high-productivity firms at the technological frontier. The U.S. systematically outperforms Europe in venture capital depth, tolerance for risk, labor market flexibility, and the ability of successful firms to expand rapidly across a large integrated market. Europe’s shortfall is not that it produces no ideas, but that its institutional environment makes it far harder for those ideas to become globally scaled enterprises. Over time, this shows up as weaker productivity growth, slower capital deepening, and lower aggregate income.
Finally, there is a quiet but crucial shift in Zucman’s argument among productivity, welfare, and economic vitality. Europe may deliver more leisure and more public insurance. But those benefits do not refute the diagnosis of eurosclerosis, which concerns innovation, investment, growth capacity, and fiscal sustainability. An economy can trade growth for leisure, but it cannot pretend the tradeoff does not exist.
Europe is not being mismeasured; it is being misdescribed. Once policy-induced reductions in labor supply, biased productivity metrics, weak firm dynamism and failed convergence are taken seriously, the conclusion is unavoidable. Europe employs fewer people, scales fewer firms, innovates less at the frontier and compounds these disadvantages over time. Calling these outcomes preferences does not make them disappear. It merely obscures their cost.