by Peter Franklin
Thursday, 12
August 2021

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.

Join the discussion

  • 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

  • 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.

  • “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.

  • To get involved in the discussion and stay up to date, become a registered user.

    It's simple, quick and free.

    Sign me up