Productivity Growth: What happened to the upturn?

At least some of us were productivity optimists in the earlier days of pandemic recovery. There was some evidence of a productivity uptick in the period from the beginning of the pandemic, continuing to the fourth quarter of 2021. While productivity growth averaged just 1.0 per cent from the fourth quarter of 2009 to the fourth quarter of 2019, growth averaged 2.3 per cent in the two years from the fourth quarter of 2019 to the fourth quarter of 2021.

Anyone who follows productivity data closely knows that the data are erratic, and even two good years doesn’t amount to much. No one should assume we’re on a faster growth path based on an uptick over a relatively short time period.

However, there was also some anecdotal evidence that we might be a faster growth trajectory. The most obvious story had to with the increased use of Zoom and other technologies allowing for teleconferencing. Insofar as business can be conducted without people traveling across town or across the country, there is a gain in productivity. There were many other stories of businesses being forced to adopt new and often more efficient ways of operating to get around the disruptions of the pandemic.

That was an optimistic story, but the picture looks much worse after the last two quarters. Productivity fell at a 7.4 per cent annual rate in the first quarter of 2022 and a 4.6 per cent rate in the second quarter. These drops totally offset the positive picture of 2020 and 2021. With the more recent data, productivity growth since the fourth quarter of 2019 now averages just 0.6 per cent.

While this might mean that the productivity optimists should throw in the towel, there still is some reason for hoping that the data from the last two quarters are an anomaly and we could be on a faster growth path. There are three directions in which the productivity optimists’ argument would go: 1. Data errors gave us the bad numbers for the first two quarters, 2. Temporary disruptions from the pandemic slowed productivity growth in the first half of 2022, 3. There are important gains in productivity not reflected in the official data. I’ll lay out each of these arguments briefly below.

Gross domestic product and gross domestic income

The extraordinary job growth in the first half of 2022 is hard to reconcile with the negative GDP growth reported for this period. Many of us have noted that Gross Domestic Income (GDI) was actually reported as growing at a healthy 1.8 per cent annual rate in the first quarter. (We don’t have GDI data for the second quarter yet.)

If the GDI measure is in fact closer to the actual rate of the economy’s growth over this period, then productivity growth would be approximately 1.4 percentage points faster than productivity calculated based on the GDP number. Instead of the 1.1 per cent rate now reported for the period between the fourth quarter of 2019 and the first quarter of 2022, the growth rate would be close to 2.5 per cent. That would still be consistent with the productivity speed-up story.

Rather than just taking GDI growth or GDP growth, it is common for economists to look at the average for the two measures. The growth rate for the average of GDI and GDP between the fourth quarter of 2019 and the first quarter of 2021 was 1.9 per cent. Using this as the basis for measuring productivity growth would give us an average growth rate of 1.7 per cent for the nine quarters since the start of the pandemic. That is not clear evidence of a speedup in productivity, but it is notably better than the growth rate for the prior decade.

Temporary pandemic related disruptions

As we know, the pandemic gave us supply chain disruptions in many major sectors of the economy. At the level of consumers, this meant shortages and higher prices for a wide variety of products.

However, these supply chain disruptions also hit businesses. They had to deal with unanticipated delays in the shipping of many products, and in some cases were forced to go without some items altogether. It would be amazing if these disruptions did not lead to slower productivity growth.

It doesn’t seem plausible that either construction technology or the quality of labor in the industry could have deteriorated so much in such a short period of time. The more obvious explanation for a decline in productivity in construction is that many workers were effectively wasting their time waiting for parts or materials that were needed for them to do their jobs. It would be reasonable to expect that when we have gotten through the supply chain disruptions associated with the pandemic, productivity in construction will return at least to its pre-pandemic level.

In short, we should have expected that the pandemic would have created a major drag on productivity growth, both through its impact on supply chains, and by forcing businesses to engage in pandemic-related safety practices that would not ordinarily be required. This means that even if businesses had sustained trend rates of productivity improvement in the way they conducted business, reported productivity would show a falloff due to the effects of the pandemic. It also would mean that we should see above trend productivity growth as the impact of the pandemic fades.

Unmeasured gains in productivity and living standards

As I argued at the start of the pandemic, changes in practices due to the pandemic are likely to lead to improvements in living standards that are not picked up in our measures of GDP and productivity. Many of these are related to the increased ability of people to work from home.

In the most recent jobs report, more than 11 million people still reported that they were working from home due to the pandemic. This does not include all the people who are still working from home, but had not previously, as a result of changes in their work situation independent of the current state of the pandemic. Clearly, a large segment of the workforce is now working from home, full-time or part-time, who had not previously had this option.

There are two ways this leads to improvements in living standards. The first is simply the time saved on commuting. The average time spent each day commuting in 2019, for those who commuted to work, was 55 minutes. This means that a person who can now entirely work from home, as opposed to commuting five days a week, would save 225 minutes commuting a week. This comes to 3 hours and 45 minutes or more than 10 percent of the length of the average workweek. To put this another way, the length of the average workweek is currently 34.6 hours. If we think of the worker’s pay as being for both their time at work, and their time getting to and from work, saving 3 hours and 45 minutes commuting each week, amounts to a 10 percent real increase in their hourly pay. This is a big deal.

Of course, many of the people who now work from home as a result of changes induced by the pandemic, only work two or three days a week at home. But this still implies substantial savings in time spent commuting, which are presumably are of considerable value to the workers who now have this option.

Counterpunch