Why would labour productivity surge during a pandemic?

Labour productivity growth is generally associated with higher wages and better working conditions. In the longer term, increased productivity is key to economic development. But how should we interpret productivity trends during a pandemic? Does faster productivity growth mean that firms and workers are actually better off?

The ramifications of the COVID-19 pandemic have greatly complicated standard labour market assessments. This also applies to assessments focusing on productivity indicators. Productivity is a measure of how efficiently inputs such as labour, capital, land, energy and other intangible factors (for example, managerial expertise) are used to produce goods and services. Enterprises and national economies can increase their productivity sustainably by enhancing the skills of the workforce, investing in better infrastructure, adopting new technologies, improving workers’ safety and health, or incorporating more efficient business practices.

What does labour productivity measure?

Labour productivity is an indicator of the efficiency of a country’s workforce, providing a measure of the average output generated per worker (or per hour worked). In the long run, labour productivity is a key determinant of living standards. Higher productivity enables (though it does not guarantee) increased consumption and/or a reduction in working hours while earning the same or greater pay. At the enterprise level, all else being constant, if labour productivity increases, a business becomes more profitable.

Unprecedented productivity growth in 2020

The impact of the COVID-19 pandemic on the global economy and labour market resulted in unprecedented developments in labour productivity. The world’s output per hour worked surged by 4.9 per cent in 2020, more than double the long-term average annual rate of 2.4 per cent registered between 2005 and 2019. This is the fastest global growth in hourly productivity observed since data have been available. A similar trend is found across all major country income groups.

Uneven impact of the pandemic on enterprises drove average productivity levels upwards

Emerging evidence from the ILO Harmonized Microdata collection suggests that an important and alarming compositional effect underpinned the surge in productivity growth observed in 2020. This effect has driven average productivity significantly upwards, but it has also led to fewer hours worked overall and highly uneven damage across the enterprise landscape.

ILOSTAT data on working hours from 26 countries indicates that smaller firms have experienced substantially greater declines in hours worked than larger firms. More disaggregated data covering 20 countries shows that the decline in working hours has been greatest in enterprises with fewer than 20 employees. Enterprises with five to nine employees experienced the largest median decline in working hours, at 16.7 per cent, followed by enterprises with 10 to 19 employees and by microenterprises with only one employee, which each saw a median decline of more than 14 per cent. By contrast, firms with 50 or more employees experienced an average decline in working hours of only 8.7 per cent. Significantly, smaller firms also reported greater outright employment losses, an indication of greater destruction of small establishments vis-à-vis larger enterprises.

The pandemic resulted in a large and rapid shift in the composition of employment between 2019 and 2020. Specifically, the share of total working hours carried out in small firms decreased in 2020. Since larger firms produce, on average, more output per hour worked than smaller firms, this compositional effect led to the unprecedented increase in aggregate labour productivity. This should not be viewed as a positive development. The reality is that labour markets were asymmetrically damaged by COVID-19, with small firms and the workers employed at these firms bearing the brunt of the fallout from the pandemic.

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New labour productivity indicator

To complement existing ILO modelled estimates on labour productivity, a new indicator — output per hour worked at PPP (constant 2017 international $) — is now available in the ILOSTAT data catalogue. Previously, only output per worker was available. For more information on labour productivity measures, see the indicator description

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