Corona pandemic – thrust or brake for productivity?

It may sound astonishing at first, but several developments could mean the corona-induced economic crisis can increase overall economic productivity in developed economies.

Could the Corona pandemic be a productivity boost?

The economic crisis triggered by the Corona pandemic has many companies contending with massive drops in production. Since production capacities remain at least in the short term, more or less constant, a lower production volume means a simultaneous decline in productivity.

Medium and long-term forecasts are unclear, but the pandemic has become an additional incentive for companies to make greater use of machines, robots, and other digital technologies. This automation can not only save companies from epidemic-related loss of employees but can also increase their productivity.

Many companies have embraced online meetings and video conferences, if employees continue to work with these digital forms of exchange rather than face-to-face meetings, companies will save time and money on travel costs. For companies, this means a productivity gain. ( source p. 12 f.).

If companies use their crisis-related underemployed staff to develop new products and technologies to optimize existing production processes and organizational procedures, innovation boosts will also occur. A further boost can come if governments promote measures for the digital and ecological transformation of the economy and society in their economic stimulus packages.

A crisis can speed up the structural change of an economy

If companies that are not competitive go bankrupt during a recession, production factors tied up there are released and can instead be put to use in more productive, sustainable sectors. This “creative destruction”  for failed companies and displaced workers is a disaster and requires socio-political support. But for the economy as a whole, this process leads to long-term strengthening of international competitiveness.

Or Is the Corona pandemic a brake on productivity?

An initial obstacle to productivity is: How can business investments be financed? If recession-related losses reduce equity capital and limit borrowing during the pandemic, the financial resources for productivity-enhancing investments are relegated to a distant future.

Many companies will try to compensate for losses during the lockdown as quickly as possible by holding on to their existing capital stock because new purchases would increase depreciation – and thus production costs.

The pursuit of cost reduction strategies can lead to companies cutting back on their research, development, and investment spending during and after the crisis, which in some cases can cause enormous damage to productivity in the medium and long term.

Qualified employees are needed to increase productivity. If redundancies occur during the crisis, companies will lose an essential prerequisite for future increases in productivity. However, as long as employees are not laid off despite production slumps (which can be prevented, for example, by using work compensation strategies in the short-time), this prerequisite remains fulfilled.

From a macroeconomic perspective, there is also the risk that an economic crisis will have a negative impact on human capital. If the recession is prolonged, young people and others just entering the labor market will be prevented from doing so, creating human capital losses that will impair the long-term competitiveness of the economy.

State rescue measures could slow down structural change if liquidity support and tax cuts keep uncompetitive companies alive. Low-earning companies that remain on the market in this way, known as “zombie companies,” put pressure on overall economic productivity.

The coronavirus pandemic, importantly, has increased economic uncertainty. It is not clear whether there will be another lockdown in the near future, how long consumers will remain reluctant to spend, and how quickly the economic situation in the main exporting countries will recover. This uncertainty is poison for investment – and without investment, there cannot be productivity gains.

Finally, the decline in the international division of labor may put a damper on productivity. The abrupt interruption of global supply chains is likely to trigger a desire by both companies and society, to source both essential inputs and end products from companies located closer to home (reshoring).

On the positive side, the resulting lower dependence on imports reduces the vulnerability of the economy to crises. On the negative side: This gain in independence goes hand in hand with macroeconomic efficiency losses.

Conclusion – There are rays of hope, but also risks

The medium- and long-term effects of the current economic crisis on overall economic productivity in industrial nations are unclear. There are rays of hope, but also risks. The risks stem primarily from the high level of uncertainty caused by the corona pandemic and the recession it has triggered. A central task for economic policy is therefore to reduce these uncertainties.

In addition to the provision of liquidity support, the government economic stimulus packages put together worldwide are also contributing to the reduction of uncertainties. If these economic stimulus packages also promote future-oriented technologies, this can increase overall economic productivity.

Note: This is a shortened version of the article “Corona-Pandemie – Schub oder Bremse für die Produktivität?“, which appeared in German on the blog “Inclusive Productivity” on July 8, 2020.