Will the pandemic productivity boom last?

For most of the past 15 years, the US economy has been mired in a period of low productivity growth. Who would have guessed that the way out could include a pandemic?

Yet that is what the numbers show. Since the second quarter of 2020, labor productivity – the amount of output per hour worked – has grown at an annual rate of 3.8%, up from 1.4% from 2005 to 2019. New data released on Tuesday showed that the trend continued this spring, with a 2.3 annual rate of productivity growth in the second quarter.

Another way to look at it: Since the pandemic recession bottomed out in the spring of 2020, the country’s gross domestic product has more than fully recovered, with second-quarter output 0.8% higher than that. before the coronavirus. The number of jobs fell 4.4 percent over the same period. Productivity growth largely explains the gap between them.

What is less clear, however, is how much of this growth represents real progress towards deploying the workforce in ways that make Americans richer over time. It’s a murky story – like any attempt to link overall productivity numbers to what’s going on in the guts of the economy – but crucial to understanding the economic outlook for the 2020s.

There are several parts to the story, and each has different implications for the future.

Jobs lost were low productivity

In terms of economic output, not all jobs are created equal. A worker in a well-run factory with advanced equipment produces more economic returns for every hour of work than a counterpart in a poorly managed place with worse equipment.

The differences are even more marked when you compare productivity between sectors, and this is where there is a clear pandemic story. Job losses are much greater in low productivity sectors than in higher sectors.

For example, on the eve of the pandemic, manufacturing jobs – very productive, with a lot of automation – paid an average of $ 28.23 an hour, while restaurant jobs paid an average of $ 15.23. Manufacturing employment in July was down 3.4% from its February 2020 level, while restaurant employment was down 8%.

As those currently unemployed return to the labor market, how many will take on higher productivity jobs versus low productivity jobs? This is essential in determining the potential for future growth of the economy.

Do more with less

The labor shortage faced by many types of businesses, especially in the service sector, forces difficult decisions to be made. And in many cases, companies unable to return to normal staffing levels are getting creative.

Restaurants are experimenting with people ordering on their phones rather than through a waiter. Retailers are offering more self-checkout options. And there is evidence that the difficulty of recruiting workers causes companies to invest more in employee training, which could shift people from low-productivity jobs to higher-productivity jobs.

Sometimes there are tricky measurement issues. For example, if a hotel charges the same prices but, with fewer housekeepers on the payroll, no longer provides daily cleaning service, this is arguably a deterioration in the quality of the product and therefore a form of inflation, rather than higher labor productivity. .

But as something fundamental is changing in terms of companies’ willingness to make labor saving investments, to rethink processes so that they are less labor intensive. labor and raising individual workers higher up the skill ladder, there is an opportunity for increased productivity that lasts longer than the pandemic.

Running themselves to shreds

The flip side could be that the apparent productivity boom, especially in the first half of this year, simply reflects people working harder than usual.

If a restaurant normally has 10 servers for its dinner shift and narrows down to seven, each one having to work a lot harder, that might look like a productivity boost. Fewer person-hours of work would generate the same economic output. It may or may not be durable as well.

But maybe people will be willing to work harder at certain jobs if the pay is higher. There is a theory of “efficiency wages” which suggests, in effect, that employers get what they pay for – that paying more means a better performing workforce.

“If you want the extra effort, you pay people extra,” said Steven J. Davis, an economist at the Booth School of Business at the University of Chicago. “You would expect to see positive productivity benefits by paying people to put in more effort per hour than they normally would. Will it be supported? Maybe if wages stay high.

The telework effect

In just a matter of weeks in 2020, millions of American workers who mostly commute to the office learned how to work from home. This could have lasting economic ripple effects if even a small portion continues to work from home some or all of the time.

“Employers are embracing this as a long-term solution and taking the necessary steps to invest in the right technology to make it truly effective,” said Julia Pollak, labor economist at ZipRecruiter. “There’s a lot of soul searching going on and companies are sharing best practices on how to virtually create a corporate culture. “

At the height of the pandemic, the vast majority of office workers worked from home. In the post-pandemic world, jobs that most require in-person collaboration may return to offices, but those that can be easily done remotely may remain remote.

“The important thing to understand is that it’s not that working from home is better for everyone, but that once the pandemic is over, the types of people for whom it doesn’t work very well will not continue it. “said Professor Davis. “It’s a selection of people who figured out how to make remote work work, and that’s where the productivity gains come from.”

There are several implications for the years to come. On the one hand, businesses would likely need less office space, desks and cubicles relative to the size of their workforce than in the past. This could mean higher “total factor productivity”, which takes into account not only the efforts of workers, but the capital investments they use to do their jobs.

On the other hand, workers themselves report in surveys that they are more productive working from home, but not necessarily in a way that appears largely in official productivity figures.

A working paper by Jose Maria Barrero, Professor Davis and Nicholas Bloom, based on a survey of 30,000 workers, finds that widespread homeworking could generate a 4.8% increase in productivity over the pre-pandemic economy, but only 1% of what one would expect to see in official statistics.

The reason? Much of the gain comes from the travel time saved, and official labor productivity statistics do not include travel time in the “hours worked” denominator.

Indeed, the pandemic has forced a lot of innovations around office work practices to happen much faster than it would otherwise.

“The adoption of technology has accelerated, new businesses are being created at an historic rate and the shift to remote working is expected to outlast the crisis,” said Lydia Boussour, chief US economist at Oxford Economics, in a statement. note analyzing the new productivity. The data. “While some of the efficiencies associated with the pandemic may take years to be fully realized, we believe these four forces will lead to a sustained recovery in productivity over the medium term. “

The future is still uncertain and economists do not fully understand what really drives productivity gains. But for now, the evidence suggests that many of the main drivers of this particular pandemic crisis are unlikely to go away anytime soon.