Understanding productivity gaps: the nexus between intangible capital and market power

Over the past decade, the United States has experienced a significant productivity advantage over the European Union, leading to a widening productivity gap. This divergence is characterized by a rapid shift towards intangible investment and rising markups in the US economy relative to the EU. Also, existing studies have predominantly focused on the US, often neglecting the role of intangible capital in shaping both productivity and markup dynamics, as well as their measurement. This paper addresses this gap by integrating intangibles and markups into a macroeconomic productivity framework, examining their interaction and their contribution to the EU-US productivity divide. Using EUKLEMS&INTANProd panel data, we estimate the impact of intangible investments on productivity in a framework considering also their links with markups. Our results show that: 1) properly accounting for intangibles implies lower estimated markups, particularly in the US and in high intangible-intensive sectors; 2) the US’ robust productivity growth can be partially attributed to earlier and more significant investments in intangible assets, which also helps explain the observed dynamics in markups; 3) in contrast, the EU lags in intangible capital and shows less significant markup trends.