Will the pandemic productivity boom last?

By Neil Irwin

For most of the past 15 years, the U.S. economy was mired in a period of low productivity growth. Who would have guessed that the pathway out of it might include a pandemic?

Yet that is what the numbers show. Since the second quarter of 2020, labor productivity — the amount of output per hour of work — has risen at a 3.8% annual rate, compared with 1.4% from 2005 to 2019. New data published Tuesday showed the trend persisted this spring, with a 2.3 annual rate of productivity growth in the second quarter.

A different way to look at it: Since the pandemic recession bottomed out in the spring of 2020, the nation’s gross domestic product has more than fully recovered, with second-quarter output 0.8% higher than before coronavirus. The number of jobs decreased 4.4% in the same span. Productivity growth accounts for most of the wedge between those.

What is less clear, though, is how much this growth represents real progress toward deploying the workforce in ways that will make Americans richer over time. It’s a murky story — like any attempt to connect big-picture productivity numbers to what’s happening in the guts of the economy — but crucial for understanding the economic outlook for the 2020s.

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

The Jobs Lost Were Low-Productivity

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

The differences are even starker when productivity is compared across sectors, and that’s where there is a clear pandemic story. Many more job losses were in low-productivity sectors than in higher ones.

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

As people currently out of work return to the labor force, how many will take higher-productivity jobs vs. lower-productivity ones? The answer is vital in determining the economy’s future growth potential.

Doing more with less

The labor shortage facing many types of businesses, especially in the service sector, is forcing some hard decisions. 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 recruiting workers is making companies invest more in training employees — potentially shifting people from low-productivity jobs to higher-productivity ones.

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

But to the degree that something fundamental is shifting in terms of businesses’ willingness to make labor-saving investments, rethink processes to be less labor-intensive and move individual workers higher up the skill ladder, there’s opportunity for a productivity surge that outlasts the pandemic.

Running themselves ragged

The flip side of this 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 waiters for its dinner shift and cuts back to seven, each of whom has to work that much harder, it could look like a productivity gain. Fewer person-hours of work would be generating the same economic output. It also may or may not be sustainable.

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

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

The work-from-home effect

In the space of just a few weeks in 2020, millions of U.S. workers who once commuted to an office most of the time learned how to work from home. It could have lasting economic ripple effects if even a modest portion of them continue to work from home some or all of the time.

There are several implications for the years ahead. For one, companies would be likely to need less office space, desks and cubicles relative to the size of their workforce than in the past. That could mean higher “total factor productivity,” which takes into account not just the efforts of workers, but the capital investments that they use to do their jobs.

For another, workers say in surveys that they are more productive working at home — although not necessarily in ways that show up big in official productivity numbers.

A working paper by Davis, Jose Maria Barrero and Nicholas Bloom that is based on a survey of 30,000 workers finds that widespread working from home could generate a 4.8% boost to productivity relative to the pre-pandemic economy, but that only 1% of that should be expected to show up in the official statistics.

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

The future is always uncertain, and economists’ understanding of what truly drives productivity gains is poor. But for now, the evidence suggests that many of the key drivers of this particular pandemic bump aren’t likely to go away anytime soon.

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