Pandemic offers a productivity boost?

 An interesting article by Chris Dillow was recently published in the Investors’ Chronicle

Has the coronavirus solved the UK’s problem of stagnant labour productivity?

A productivity boost?


It’s a strange question, but one posed by Office for Budget Responsibility (OBR) forecasts.

It expects that in 2021 we’ll be producing 2.8 per cent more than we did in 2019, as this year’s 12.8 per cent drop in gross domestic product (GDP) is followed by a 17.9 per cent rebound next year. But we’ll be doing that with half a million fewer workers. This means that, if the OBR is right, productivity will grow more in the two years from  2019 to 2021 than it did in the 12 previous ones.

Of course, all economic forecasts now must be taken with a ton of salt. But this poses the question: how could Covid-19 raise productivity?

One possibility is a compositional effect across sectors. If the downturn disproportionately hits low-productivity sectors while the recovery benefits higher productivity ones more, then aggregate productivity will rise as a mathematical fact. I’m not sure. Yes, some low-productivity industries have seen output collapse, such as pubs and restaurants. (We can, roughly gauge productivity from average wages). But also, some high-tech manufacturers have also been hit. And the high-productivity health sector is expanding now but will (we hope) contract next year.

A second possibility is that this recession will have a cleansing effect. It will drive inefficient businesses to the wall and so give more efficient ones space to expand. This certainly happens in some recessions – although it didn’t in the 2008-09 one. But it might not be the case this time. People are staying away from good shops and restaurants as much as from bad: they have no choice. Whether a company survives this recession will depend a lot on its balance sheet: cash-rich companies have a better chance than heavily indebted ones. But the correlation between balance sheets and productivity is weak: companies can be cash-rich because they are too inefficient to expand.

This leaves a third possibility. In the early phase of the upturn companies will respond to stronger demand not by taking on extra workers but by working existing staff harder. This will raise GDP per worker, probably by more than GDP per hour. It’s only when companies can be confident that demand will persist that they’ll start hiring.

Indeed, this third possibility is what the OBR expects. It foresees productivity falling back in 2022 as employment returns to – and in fact above – its 2019 peak.

Of course, the OBR’s numbers could well be wildly wrong – but this rough pattern looks right to me. The coronavirus, then, will give only a temporary stimulus to productivity.

This shouldn’t be surprising, as the fundamental determinants of productivity – the capital stock, skills, innovation, management quality, product market competition and so on – will not improve as a result of this crisis and some might even deteriorate.

Many people like to think that this crisis will change things permanently. One thing it is unlikely to change, however, is our lamentable productivity record.

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