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â An odyssey into unchartered territory: Under normal conditions, two measures of productivity – output per worker and output per hours worked – tell similar stories and convey important information about economic performance, unit labour costs and the like. But the extraordinarily abnormal circumstances caused by the Sars-CoV-2 pandemic have altered this. As our chart highlights for the UK, the two headline estimates of labour productivity apparently tell contradictory stories about the impact of the pandemic on worker performance. To paint a clear picture of the current state of economies, we need to understand exactly what data are measuring even more than before.
â The limits of data: The UKâs Coronavirus Job Retention Scheme (CJRS) – which incentivises companies to hoard their labour – has prevented the sharp increase in unemployment that would normally follow a major slump in economic activity. As a result, a huge gap has emerged between aggregate hours and total employment. Although the pandemic triggered a record 20% drop in hours worked between January and May, data for November show that the UK has lost only 570k of its 33.1m jobs during the pandemic so far. As productivity measured by output per hour has increased after a brief dip, the alternative estimate based on output per filled job remains very subdued despite a partial rebound.
â So has productivity gone up or down? At present, it is impossible to say. Both available series are merely proxies for actual productivity – which is already hard to measure due to difficulties estimating services inflation. While output per hour may have increased in some sectors, it is hard to imagine how economy-wide efficiency has improved under the heavy burden of pandemic restrictions. Part of the rise in output per hour seems to be driven by higher job losses in low-productivity sectors of the service economy, thus skewing total employment towards higher productivity jobs.
â The furlough story: The story we describe for the UK also applies across Continental Europe, where furlough and short-time support schemes have maintained estimated employment at levels only modestly below pre-pandemic highs. The situation is different in the US. Across the Atlantic, where furloughed workers are counted as unemployed, the government relied on direct transfers to support household incomes rather job support schemes. Estimated unemployment thus increased by more in the US (4.4ppt) than in the Eurozone (0.4ppt) in 2020. As a result, the gap in output per hour and output per worker has not appeared in US data. While the pandemic lasts, hours worked provide a better guide to labour market conditions and for cross-country comparisons. Furthermore, estimates of productivity and unit labour costs do not currently provide a good signal for near-term trends in corporate profits.
â Converging in late 2021: Once life returns to more normal and the economic upswing gathers pace, the two measures of productivity will converge once again. A recovery real GDP will lift output per filled job while a sharp rise in hours worked will probably lower output per hour. With some luck, both measures will converge above their pre-pandemic level.
â The case for productivity optimism: The pandemic has challenged engrained working habits and increased the diffusion of some frontier technologies. In services, many sectors – such as finance – have switched to remote working, made possible by cutting-edge information and communication technologies. In manufacturing, companies are shortening their supply chains to protect against future shocks – this will entail increased capital expenditure on advanced robotics and the like. In time, these changes can enhance supply chains and production and raise productivity growth.
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kallum.pickering@berenberg.com
Florian Hense
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