By placing the global economy into deep freeze, governments across the world have triggered one of the deepest economic downturns in living memory. In England, the present downturn is said to be the worst one since 1707. It is hard to find much upside to this, but perhaps some solace might be found in the question of productivity?
It is normally the case that a deep recession will raise productivity within an economy. It is usually the case that lesser productive firms go to the wall, releasing the staff and capital that they used into the pool of available capital and labour. At that point, as a matter of sheer arithmetic, the average levels of productivity will rise. As we go forward in time, new firms will be formed, drawing upon the pool of available labour and capital, to raise the total level of productivity in the economy. This is how the process of Schumpeter's 'Creative Destruction' works.
The process of creative destruction has not been evident following the global financial crisis of 2008. Within the advanced economies, a sustained slowdown in productivity set in that suggests a more muted recovery from the pandemic might be the order of the day. There are three broad explanations as to why this might be. First, it may be the case that the impacts of the newer technologies - AI, Cloud Computing, and Robotics - have been over-exaggerated. Second, it may be the case that investment in the newer technologies has been constrained by weakened demand. Third, it might be too soon to see the impacts of a new adoption curve. All three of these may be right, in varying degrees, but what does that tell us about the years ahead?
The pandemic has made us do things differently. One factor noted by many observers is that much more work is now being undertaken from home. It is uncertain whether or not this makes us more productive. In some cases it will, and in other cases it won't. Either way, a combination of the new technologies - AI and cloud computing in particular - have enabled this trend. For some, this will be the way of the future. For others it won't. We might reasonably expect to see more home working and fewer trips to a centralised office, so perhaps those who declare the end of the office might be a bit premature?
It is not only in the uptake of new technologies that might contribute to a productivity uptick. The need for social distancing is forcing businesses to organise their production differently. We are all familiar with the growth of home delivery becoming incorporated into business models. The internal organisation of work teams and the flow of work through complex business processes has also had to change. Some of these changes represent real improvements to productivity. Some enhance the quality of output - a disguised productivity gain. These changes are likely to be retained after the pandemic, raising the productivity of the surviving firms.
After a long period of stagnation, we can be optimistic about the prospects for productivity in the years ahead. The fiscal response of expansion - rather than austerity - will help to underpin corporate profits in the near future. Contrary to the Piketty model, the rates of corporate profits following the global financial crash had been falling. If they start to rise again, we can reasonably expect corporate investment to rise again, especially if coupled with public investment in digital infrastructure and education. It is possible that both supply and demand factors could act to spur productivity in the near future.
One further long term factor may act to enhance productivity - demographics. In the next few years, a natural process of labour shedding will gather pace as the Baby Boomers retire in ever increasing numbers. This will have an effect - in the absence of mass immigration - of leading to wage rates hardening. In some case, by a great deal. If labour becomes appreciably more expensive, then a cost advantage for mechanisation arises. This is the point where AI, cloud computing, and robotics are likely to dominate as trends. If this is the case, then productivity could be set to rise substantially.
It remains to be seen how much of this is the result of the pandemic and how much would have happened in any case. Prior to the pandemic, the government had announced an end to austerity and had signalled an intention to develop both the physical and digital infrastructure of the UK. The ageing of the Baby Boomers has only been marginally impacted by the pandemic and their departure from the workforce is relatively independent of government policy. In this respect, the pandemic will not have influenced productivity greatly.
What the pandemic could be claimed to have done is to accelerate the trends already under way. In the public sector, in particular healthcare, the adoption of the new technologies has greatly accelerated over the pandemic. For example, family doctors are now far more productive owing to video consultations. Although austerity had ended, it was not envisaged to have ended with quite the fiscal expansion that we have actually seen. In this respect, existing policy is far more exaggerated than originally planned.
Perhaps that's how the pandemic has affected productivity? Perhaps the pandemic has forced us to do what we were doing in any case, only more so? To that extent, it could have a lasting impact.
Stephen Aguilar-Millan
© The European Futures Observatory 2021
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