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Dec 21, 2022

American Growth Project: Productivity – Making Work Count

What makes economies grow? As complicated as the question might seem, the answer should be quite simple: The more people you have working, the larger your economy is likely to be. This explains why, for example, India has one of the largest economies in the world. But the raw size of a labor force alone fails to tell the full story. Although India’s labor force is nearly three times the size of the U.S. labor force, its total economic output remains less than half that of the U.S.[1]

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The missing component here is productivity, or the level of economic output generated by each worker. Productivity can be increased through a variety of channels, such as mechanization, more efficient energy use or more streamlined organization of workers and their processes. Ultimately, all these mechanisms result in workers being able to do more with the time they spend working. More productive areas and workforces can provide more goods and services for the same amount of work, which in turn promotes higher standards of living. This is why economists, business leaders and policymakers strive to increase productivity.

Pandemic Productivity (and the Prior 130 Years)

For the most part, the U.S. has seen its productivity grow steadily through the past 130 years with only intermittent periods of decline.[2] During that period, we estimate productivity grew 2.1% per year on average. However, that rate of growth has varied dramatically across different eras. For example, from the post-World War II period until the early 1970s, productivity grew at an average rate of 2.8% a year. It then slowed to 1.4% until the mid-1990s, accelerated to 2.7% until the mid-2000s, and then – despite innovations such as smartphones – decelerated sharply once more, averaging just 1.4% from the mid-2000s until the onset of the COVID-19 pandemic.

Since Q1 of 2020, productivity has fluctuated even more than usual. With the arrival of the pandemic and the restrictions that followed, U.S. productivity jumped 4.4% in 2020, the fastest pace in more than 30 years, and grew an additional 2.4% in 2021. Productivity slumped in the first half of 2022, however, and despite rebounding slightly in the third quarter, it is still on track to have its biggest decline since at least 1974.[3]

What explains these rapid shifts in productivity? As the pandemic progressed, many businesses had to institute layoffs or close shop altogether. And while the economy shrank, employment – the denominator in our productivity metric – fell even more. Though all sectors of the economy were affected, the impact was felt unevenly, hitting leisure, hospitality and other low-productivity industries the hardest.[4] Aided by technologies such as videoconferencing platform Zoom, many high-productivity workers were able to shift to working at home while many low-productivity workers were unable to do so. These low-productivity sectors subsequently observed job losses that decreased their share of the overall workforce. Thus, the productivity surge observed in 2020 was due more to distortions in the labor force created by the pandemic than to the ability of Zoom to maintain productivity. (As we discuss in our full report, “The Power of Productivity,” the creators of such technologies were significant beneficiaries of many businesses’ rapid shift to remote work.)

All this led to productivity surging during the early part of the pandemic. As households and businesses adapted to life during COVID, governments relaxed lockdown and social distancing requirements, and as vaccinations came online, the economy rebounded. Employment continued to lag, however, which meant that productivity remained high. In the first half of 2022, the economy contracted while national employment continued its strong upward trajectory. In addition, this year has seen low-productivity jobs return at high rates and overall worker attitudes shift toward decreased engagement (as exemplified by the rise of “quiet quitting”). As a result, some of the productivity gains of the early pandemic period have reversed. 

Where Are We Headed?

Does this augur a return to the bad old days of pre-pandemic productivity malaise? Economists, businesspeople and policymakers know the general building blocks of productivity: a skilled labor force, machines to leverage that labor force (such as computers and robots), and innovations that allow for continued efficiency gains. The problem is that the mix of machines and skills vary among industries and locations, and the ecosystem for innovation is hard to understand and re-create. If it were easy, of course, we would never have productivity slowdowns.

We also know that it often takes time for new technologies to be integrated into the economy – because individuals and businesses need to learn how to harness these technologies by changing production processes or making investments in complementary technologies.[5] This helps explain why, per the chart above, the late 19th century harnessing of electricity was only seen in the productivity statistics of the early 20th century.

Thus, the productivity experience around the 1918-19 Spanish flu pandemic may provide some clues as to where we are headed. Productivity jumped in the early flu period and then declined as the flu waned (though it is admittedly hard to disentangle the economic effects of the World War I engagement and drawdown from those of the flu). Productivity then grew strongly until the late 1920s and the onset of the Great Depression. Will better integration of existing technologies such as videoconferencing that aided us during the pandemic and innovations such as artificial intelligence and mRNA vaccines usher in a new era of high productivity, or should we be concerned about heading toward another Great Depression?

[1] The size of the economy is based on purchasing power parity, which tries to equalize the value of goods and services produced in India and the U.S. Using dollars as the common denominator, the U.S. economy is more than seven times larger than India’s. 

[2] The official measure of productivity from the Bureau of Labor Statistics starts in 1947, but the Kenan Institute has created a measure of productivity going back to 1889.

[3]  U.S. Bureau of Labor Statistics. (2022, December 7). Economic News Release: Productivity and Costs. https://www.bls.gov/news.release/prod2.nr0.htm

[4] Stewart, J. (2022). Why was Labor Productivity Growth So High during the COVID-19 Pandemic? The Role of Labor Composition (Working Paper 545). U.S. Bureau of Labor Statistics. https://www.bls.gov/osmr/research-papers/2022/pdf/ec220010.pdf

[5] Brynjolfsson, E., & Petropoulos, G. (2021, June 10). The coming productivity boom. MIT Technology Review. https://www.technologyreview.com/2021/06/10/1026008/the-coming-productivity-boom/

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