The COVID Crisis and Productivity Growth

After the initial wave of the pandemic recedes, productivity will (have to) become yet again a primary concern of economists and policymakers. There are a number of reasons why this crisis might further impair productivity growth, including higher transactions costs (Baldwin and Weder di Mauro 2020), lower mobility, and a reduced scope of resource reallocation across firms, sectors, and countries. There might also be some positive impulses from induced innovation. Either way, policy will matter, and wise choices could mitigate productivity decelerating effects of the crisis and enhance the influence of productivity-accelerating factors.

The world entered into the COVID crisis in the midst of a 15-year-long productivity growth slowdown. While much debated, there is not yet a consensus on its causes. Regardless, the potential effects of the current partial shutdown of the world economy on the trajectory of productivity growth is a critical question. In this column, we consider the channels through which the crisis might shift the growth rates of productivity and output.

We focus on the expected effects on true productivity, but one thing worth mentioning in passing is that it is likely that in the short run, measured productivity will fall. Several governments are implementing policies to encourage labor hoarding, hoping to keep employees on firms’ payrolls even as those firms’ outputs decline (even necessarily decline, under the hope that the drop in activity will slow the spread of the virus). This measurement issue will unwind at a pace determined by the speed of the recovery and future policy decisions, but could nevertheless swamp changes in underlying productivity growth for some time.