This paper describes recent trends in productivity growth in the EU and the US. By adopting a sectoral perspective, we achieve a deeper understanding of the compositional patterns of aggregate growth and shed light on the reasons why the EU productivity has lagged behind the US during the period 1995-2007. This may be of use for policy makers in order to design policies to close the gap. Whilst our findings indicate that performance in manufacturing sectors of many EU countries has been strong, we observe notable disadvantages in relation to productivity performance of key market service sectors. Restrictions in product and labour markets prevailing in many EU countries have been put forward as potential factors causing poor productivity; research shows that these can have particular harmful effects in services sectors given their large size and inter-linkages to other sector of the economy.