by Peter Franklin
Thursday, 12
August 2021
Explainer
11:00

The mysterious Covid productivity bonus

Interrupting access to cheap labour may have a positive outcome
by Peter Franklin
Credit: Carl Court/Getty Images

Over the last decade or two, productivity growth in the West has slowed to a crawl. The result is stagnant wages, rising debt levels and growing inequality.

But all of sudden though things are on the move again — or at least they are in America. Writing for the New York Times, Neil Irwin documents an apparent “productivity boom”:

Since the second quarter of 2020, labor productivity — the amount of output per hour of work — has risen at a 3.8 percent annual rate, compared with 1.4 percent 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.
- Neil Irwin, NYT

Meanwhile, in the UK, the furlough scheme has meant millions of workers not producing anything, but are still employed. This messes up the productivity stats. However, the ONS does produce a measure of output per job that excludes the furlough factor. And, yes, this does seem have risen during the pandemic. 

As Irwin argues, this could be the result of differential job destruction. More low productivity roles have been destroyed than high productivity ones — thus increasing labour productivity on average. If so, it’s a hollow victory: an artefact of the incomplete way in which we calculate the figures. 

The standard approach to measuring labour productivity is to treat the unemployed as if they didn’t exist. However if we included them and counted their economic output as zero (because they’re not in paid work), then that would paint a very different picture.

For instance, countries that leave the least skilled part of their working-age population to languish on the dole wouldn’t look so productive compared to economies that provide jobs for just about everyone. Similarly, the current Covid boost to productivity wouldn’t look so impressive if we factored in the zero productivity of all those who have lost their jobs over the last 18 months.

And yet that’s not the whole story. While Covid has destroyed jobs, it’s also created labour shortages — for instance by disrupting the mobility of workers within and between countries. This has forced employers to find new and smarter ways of operating.

If this is the dominant factor in the productivity boom, then there might be something to it. Indeed, we may come to see the pre-Covid era of easy access to cheap labour as something that held us back.

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Tom Lewis
Tom Lewis
1 year ago

“we may come to see the pre-Covid era of easy access to cheap labour as something that held us back.”
Funny that. Maybe all those policy makers, instead of doing degrees in politics, should have concentrated on degrees in History. Then, they might have realised “it ain’t the first time darlin”.
My edumacation didn’t extend very far, but even I remember, from my History A-level (which I failed miserably) that by the time of WW1 Britain had lost it’s industrial lead to the likes of Germany, due to an over reliance on cheap labour rather than innovation. Even a “thicky” like me, without the benefit of tertiary education can see that.

Last edited 1 year ago by Tom Lewis
Ian McKinney
Ian McKinney
1 year ago

Yes, funny how the same people who are the ones who have benefited most from cheap labour are invariably the ones who protested the most about leaving the EU….

Just another (partially) Brexit dividend.

Last Jacobin
Last Jacobin
1 year ago
Reply to  Ian McKinney

Could you clarify that point. I’m not sure who it is you’re referring to when you talk about those who have benefited most from cheap labour?

Ian McKinney
Ian McKinney
1 year ago
Reply to  Last Jacobin

Those who own businesses or stock in businesses employing the cheap labour – who coincidentally also often benefit personally from the Eastern European cleaner they pay half the wage to that they used to pay Doris, and the Filipino carer who looks after Mummy is minimum wage so that saves a fortune on the registered nurse, and of course let’s not forget the Brazilian musician who teaches the children piano for a pittance….

Billy Bob
Billy Bob
1 year ago

It’s all rather simple really. A supply of cheap labour means wages remain low, so industry has no need to invest in new tools and technologies to improve productivity as they can simply hire extra workers instead. Higher wages means it becomes prohibitively expensive to do so, so instead they invest in ways to get more output from the staff they already have.
Higher wages also means some of the more poorly performing companies fail, therefore their market share is taken by a more efficient competitor, again improving productivity across the sector.
Strangely enough all these arguments were dismissed as bigotry during the Brexit debate, yet now the proof is there before our eyes. The same is also happening in NZ due to their strict border policies, companies are no longer able to use backpackers and cheap labour from the Philippines and the Pacific and wages are rising the fastest they have in a generation

Matt M
Matt M
1 year ago
Reply to  Billy Bob

Automation is on the rise too which is another response to a cut in supply of cheap labour.

I first saw people placing orders on a terminal rather than speaking to an employee in the McDonalds in Knightsbridge in 2017 (which I assume was part of a pilot). This summer I have seen the same set up in a fish and chip shop off-the-beaten-track in Cornwall. Soon, ordering fast food at the counter will be a thing of the past and British productivity will have ticked up another notch. Due to technology focusing scarce Human Resources on the most valuable – or hardest to automate- tasks.

Last edited 1 year ago by Matt M
Hardee Hodges
Hardee Hodges
1 year ago

Perhaps the retirement of more boomers is a factor, along with many in their 50’s that gave up. More energetic workers are replacing them bringing fresh notions to the workplace.

Galeti Tavas
Galeti Tavas
1 year ago

The fact of Tech is it is deflationary. Increasing productivity, the same dollars chasing more goods. The other side is increased M2, money supply, is inflationary as it is more dollars chasing the same goods.

Covid Response has completely messed up the entire economics. USA had a 25% increase in M2 in 14 months (cash in $) – this is hugely inflationary, and the latest inflation is 5% or so – but then tech has come forward very much due to the lockdowns, and the ‘Civilian labor force participation rate’ has drooped from 67% in 2001 to under 62% now. Money velocity is very low. 28
Deficit spending has skyrocketed to China.

P/E of the equities are vastly over priced, Bonds ‘expensive’ (means they pay almost nothing), 10 year Treasury 1.36% so that is crazy, Gov interest rate is ZERO, USA Fed is buying 120 Billion of bonds and Mortgage backed securities a month to keep interest zero and equities high and can not even talk of Tapering, and now 5 Trillion ‘Stimulus’ is getting ready to begin. I do not hear much of the EUCB (EU Central Bank) for some reason – but I would guess they are up to something stupid.

USA Fed tax revenue, 3,7 trillion, spending budgeted 6.84 trillion. Fed Debt 28.6 trillion, 128% of GDP and Biden is ready to kick that way higher. US gov all -debt 85 Trillion, private debt 22 trillion… You need to watch the numbers spinning – USA official Debt Clock, it is WILD https://usdebtclock.org/

There is no covid productivity bonus – the world is in total chaos like never seen before. Lies, Da*n lies, and statistics are being used to mislead. If there is an increase in productivity it must be because unproductive are being excluded from the count, and it does not include the debt and deficit spending – .we are doomed, not growing wealthier.

‘here is your hamburger sir, the price is a dollar less than it was before covid, but unfortunately we had to add a $700 service fee to your bill to cover 14 months of covid expenses.’ That sort of productivity gain?