COVID-19 and productivity in the UK
By Professor Richard Harris - May 2020
The impact of the current world pandemic looks set to have an unprecedented impact on the world economy. The secretary-general of the Organisation for Economic Cooperation and Development (OECD) stated on the 23 March that a global recession looks "increasingly likely" in the first half of this year, "and we must act now to avoid a protracted recession". According to International Monetary Fund (IMF) Chief Kristalina Georgieva, the global economy contracted by 0.6% in 2009 as a result of the 2008 global financial crisis, but major emerging markets like China and India at the time were growing at a rapid rate; in contrast, some forecasters believe that the current the downturn could be 1.5%. Following restrictions on the opening of pubs, bars and restaurants it was being predicted by the Unite union in that up to a third of the UK’s 3.2 million hospitality jobs are under threat.
What is likely to be the impact on productivity in the UK? Obviously, it is too early to make any definite or accurate predictions, so here the intention is to look to the 2008-09 recession as a possible benchmark for what is about to unfold.
Using an Office of National Statistics (ONS) dataset to show the impact of the 2008-09 financial crisis we see that labour productivity was growing at around an average of 1.96% p.a. during 1990-2007, and following the recessionary dip the trend has been closer to 0.5% p.a. on average. An extrapolation of what would have happened to productivity if the 1990-2007 trend had continued would have resulted in a gap of around 17 percentage points by the end of 2019 in what might be considered ‘lost’ productivity in the UK economy.
The drop in productivity post 2007 was mainly due to a fall in the production of goods and services (as is typical of all recessions), accompanied by a much smaller fall in employment. What was different about the 2008-09 recession was the ‘hoarding’ of jobs relative to previous recessions, such that it has taken productivity much longer to recover to pre-2008 levels.
By taking just the recessionary period the shallow dip in employment and its levelling off before a slow growth back to pre-recessionary levels can be seen, while output fell by significantly more and only returned to its pre-recessionary level in 2013 Q1. Consequently, productivity only fully recovered to pre-2008 levels by 2012 Q3, i.e., 4½ years later.
Losses in productivity were mostly caused by output falls not compensated by cuts in employment. As stated above, this was somewhat unusual in that most recessions see the immediate fall in output later matched by employment falls, with the latter typically then having a greater ‘depth’ and lasting longer. Indeed, many firms use recessions to ‘cleanse’ inefficiencies and introduce new (often labour-saving) technologies. In short, recessions typically impact in the short-run by reducing labour productivity, but in the long-run introduce structural changes that increase economic resilience. This did not happen post 2008-09.
Will the current crisis be like the 2008-09 recession or more typically follow earlier patterns where productivity levels recovered much faster (and usually to pre-recession trends)? Given that the immediate response of government has been (understandable) supply-side measures to try to protect jobs (through employment subsidies), and given the dramatic fall in demand for certain service sector industries (such as the distribution, transport, and accommodation & food sectors), it seems very likely that employment levels are expected to receive greater ‘protection’ than the production of goods and services, and the trends are more likely to be repeated in productivity terms (albeit with greater negative consequences).
Indeed, productivity in the production (with construction) vis-à-vis service sectors, shows that 5 sectors were particularly ‘hard hit’ by the 2008-09 recession. The production sector took a larger hit earlier on, but recovered faster, while it took services much longer to return to pre-2008 levels. In the arts & entertainment sector and transportation services especially, there was still an important gap over 5 years after the start of the recession (together with the fall in productivity having been much more severe in these sectors). Most of the change in productivity was the result of output changes (while jobs were largely maintained at pre-recession levels or saw only relatively small declines which recovered more quickly). And output only recovered to 2008 Q1 levels in 2013 Q3 for distribution (i.e., 5 years later), while it took until 2014 Q3, 2015 Q1 and 2019 Q1 for arts & entertainment, accommodation & food, and transportation services, respectively (an average of nearly 9 years for these sectors as a sub-group).
The impact on the world economy of the current world pandemic is predicted to be severe, perhaps 2 – 3 times more severe than in 2008-09. Using the 2008-09 recession as a guide of what might happen, where labour productivity moved to a new, much lower growth trajectory, and took a much longer time to recover to pre-recession levels compared to recessions that took place in the 20th century, it seems likely that the UK will follow the same pattern as post-2007 but with deeper ‘cuts’ in productivity and longer recovery time to follow. In part, this is because the government (for clear and obvious reasons) is seeking to protect employment levels, which is the main feature of what happened to productivity following the financial crisis in 2008-09. Sectors like construction, distribution, accommodation & food, transportation services, and arts & entertainment are likely to face the brunt of what is about to impact on the UK (and world) economy.