Research
Competitiveness of manufacturing industries in the euro area versus the US: A comparative analysis of unit labor costs
There is a significant gap in productivity and competitiveness between Europe and the US. Unit labor costs in exporting industries are almost 30% lower in the US than in the euro area. The US has a highly competitive export sector, which has been gaining further ground relative to Europe in energy-intensive sectors and innovative sectors.
The manufacturing industry of the euro area has been struggling with declining productivity growth for years. Rising energy costs and the looming threat of a global trade war are now exacerbating concerns within the sector. In this report, we examine and compare the competitiveness of the manufacturing industry in the euro area with that of the United States. We use unit labor costs – i.e. nominal wage costs in respect to real productivity levels – as our main indicator of competitiveness.
We find that in 2023, unit labor costs in the US manufacturing industry were almost 30% lower than those in the euro area. The US has lower unit labor costs than the euro area in almost all manufacturing sectors, except for rubber, plastics, building materials; wood, printing, and paper; and chemicals and pharmaceuticals. Between 2015 and 2023, major manufacturing industries in the euro area, such as the machinery industry, transport equipment, the food industry, and the electrical equipment industry have been gaining ground compared to US in terms of changing unit labor costs. In these sectors, gains in productivity and changes in labor costs almost always worked in tandem to improve the euro area’s position against the US.
We see some worrying trends in the production of basic materials, such as steel and chemicals. These sectors have been hit hard by rising energy costs, which have risen much faster in the euro area than in the US and many other countries, and have rapidly become less competitive relative to the US.
We identify five opportunities for the euro area manufacturing sector to improve its competitiveness. Increase R&D efforts to boost productivity growth, work according to European harmonized standards to increase efficiency and better capture economies of scale, support the advanced manufacturing industry, strengthen European supply chains to ensure strategic autonomy, and accelerate the electrification of European industry.