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Productivity in the post-COVID era

Craig Alexander, Chief Economist of Deloitte Canada, gives some thoughts on what the COVID 19 crisis could mean for productivity development.

One of my main concerns about economic recovery after the crisis is the potential slowdown (or total decline) in labor productivity. There is some evidence that workers are, on average, less productive when they work from a distance than when they are in the office. And since distance working is likely to remain a significant part of business life until a vaccine is fully implemented, overall productivity is likely to suffer.

This could be exacerbated by physical distance regulations in retail, finance, transportation and other service-producing sectors. The new restrictions are likely to increase costs and require investment in potentially unproductive capital (barriers, scanners, etc.) when maintaining an office, running a business or producing in a factory. In the absence of productivity gains, rising operating costs are expected to exert downward pressure on wages or upward pressure on prices, making a slow recovery scenario much more likely.

However, this gloomy short- to medium-term view hides the possibility of some very large long-term productivity gains if the opportunities are seized. To illustrate this, let us look at the main macroeconomic and geopolitical trends from three different perspectives.

First, before COVID-19, the global economy underwent structural changes that are still affecting businesses. These include issues such as the ageing of the workforce, the increasing importance of immigration for economic growth and policies to combat climate change.

Second, COVID-19 has accelerated some of the existing trends. The pandemic has greatly accelerated the shift towards digital adoption and consumption and is likely to rapidly accelerate the use of artificial intelligence (AI) and the exploitation of large amounts of data. The future of work is also changing due to accelerated automation and the shift to remote working, which is likely to continue even after the economy reopens.

Third, the pandemic has also created new trends that did not exist before, including changes in consumer behaviour in terms of health and trust.

These transformative forces are likely to lead to many business failures in the current recession and its aftermath. Closures due solely to the new disruption caused by the pandemic represent a particular economic loss. However, many companies that have already been disrupted by the first two factors will fail. For example, we are seeing companies that invested in digital technology before COVID-19 flourishing, while companies that did not invest enough in the transition to digital technology are faltering. From this perspective, it could be argued that the process we see is an acceleration of creative destruction, which is an inherent part of economic evolution – a cornerstone of economic theory since the 1950s.

We can lament the loss of businesses, but we should also remember that closures provide an opportunity to create new businesses during recovery and subsequent expansion. Indeed, we believe that policy makers should create incentives and create an environment that encourages start-ups, which would be very beneficial to the recovery of jobs. And these new firms will be positioned to thrive in the new post-CVID environment, which will be more digital, more automated, better informed through AI and will employ a more flexible workforce. This would make the economy more flexible, productive and competitive.

There is also the possibility that many of the small businesses that will be lost are lifestyle businesses. These are businesses where the owner has the ambition to provide a good quality of life for his family rather than seeking growth and size. In the post COVID world, we could have stronger, more competitive businesses if start-ups are more focused on growth and scaling.

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