May 28, 2024 - Economy

U.S. vs. Europe: The new AI economic divide

Illustration of the EU flag with binary code instead of stars. 

Illustration: Aïda Amer/Axios

Economists are debating how AI might reshape the U.S. job market and boost productivity growth in the decades ahead. But a new paper finds that such benefits will be harder to match across the Atlantic.

Why it matters: The result might be a widening divide in innovation and economic outcomes between the U.S. and continental Europe.

Driving the news: As it stands, the U.S. and Europe are on divergent paths for generative AI adoption, according to a new paper by the McKinsey Global Institute — a predictable result, given that most of the technology has been built in the U.S.

  • "Automation technology has the potential to revive productivity, allowing economies to solve most of today's labor market challenges," the paper notes.
  • "Europe and the United States are not on the same trajectory for capturing this productivity growth: most AI-related innovations are developed in the United States."
  • In the past, Europe has moved more cautiously with all kinds of technological innovations, regulating them more heavily amid worries about labor-displacing technology. AI could turn out to be another example.

State of play: U.S. productivity has been booming — a development that probably doesn't have much to do with AI adoption so far. The rest of the world hasn't kept up.

  • "It's just mind boggling that productivity [growth] in the United States between 2019 and now has been 6%. In Europe, 0.6%," European Central Bank president Christine Lagarde said at an event hosted by the Council on Foreign Relations last month.
  • "There are lots of innovators, there are lots of entrepreneurs, but they run away from Europe. They go somewhere else to get financing, so we need to address that particular issue," Lagarde said.

The big picture: The McKinsey paper points to structural factors that might reshape demand for certain workers, including an aging workforce and health care needs — both of which are particularly acute in Europe.

  • Plus, in a scenario of widespread AI adoption, occupations that require repetitive tasks and low-skill data processing could see plummeting demand, including sales and office support.

By the numbers: In that case, the paper estimates both the U.S. and Europe will need as many as 12 million people to transition to different types of jobs over the next half-decade.

  • That could be an easier lift for the U.S., where transitions of this scale are in line with the pre-pandemic norm. In Europe, it's double the pre-pandemic pace.

What they're saying: "If you look at the potential for Europe, it would require a step up in that metabolic rate of people being able to move to doing different things. In the U.S. this rate has been higher historically," Anu Madgavkar, a partner at the McKinsey Institute, tells Axios.

  • About 1.2% of the U.S. workforce shifts jobs each year, whereas 0.4% of the European workforce changed occupations annually between 2016 and 2019, the paper says.
  • Without the required worker shifts, the paper warns of a polarized labor market: one with more higher-wage jobs than workers and too many workers for lower-paying jobs.

The paper says the fastest technology adoption scenario could help Europe notch productivity growth of 3% through 2030.

  • Slower adoption and fewer worker transitions would mean 0.3% productivity growth, closer to the current growth rate in Western Europe.
  • With the "more dynamic labor market" in the U.S., productivity growth would stick to the historical norm in the coming years — though it might accelerate as adoption becomes more widespread.

The intrigue: The paper says the job market shifts related to the pandemic are comparable to what might be needed to adapt to AI.

  • "Both Europe and the United States navigated even higher levels of labor market shifts during the pandemic, signaling the potential to handle future transitions as well," the paper says.
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