Be alert but not alarmed about post-COVID productivity slump

6 December 2023 | Danielle Wood and Alex Robson

Another national accounts release, another lacklustre annual productivity statistic – but with a glimmer of hope.

Over the year to September, labour productivity growth fell by 2.1%. While this is a slight improvement on the previous quarter, it represents a slide of about 0.9% since just before the pandemic.

As leaders of the Productivity Commission, these numbers make us take notice. But before we panic, it is important to understand what has driven the wild ride in the statistics since 2020.

The COVID-19 shock played havoc with the economy, and with it some of our key economic data. In the first two years of the pandemic, social distancing restrictions reduced hours worked to the greatest extent in lower-productivity services sectors like arts and hospitality. The effect was to increase average productivity.

After the end of restrictions in 2022, working hours expanded again in these sectors and pushed productivity in the opposite direction.

The strong performance of the labour market through much of 2022 and 2023 has also been a drag on measured productivity.

Strong labour markets are particularly good for new entrants and more marginal workers, including younger workers and those with lower levels of education. Such workers are often employed in lower-productivity service sectors and on average tend to be less skilled, at least in the short term. While this has hit the productivity numbers, it is still cause for celebration: better employment opportunities for disadvantaged workers represents a great economic and social outcome.

Over the past year, an increase in hours among those already working suggests that some workers may be responding to cost-of-living pressures by working more. This too may be generating some drag on productivity because the capacity to pick up additional hours is also more common in sectors with lower average productivity, such as food delivery.

In summary, a good deal of the more recent productivity plunge is a byproduct of COVID-19 lockdowns and the macroeconomic cycle.

Other explanations

But the impact of these cyclical contributors should be starting to diminish in the data. Which leaves us with the question: What else might be going on?

Various other explanations for the short-term decline have been put forward, including COVID-19 infections, post-lockdown burnout, working from home, the lingering impacts of pandemic support, less capital per employee, and businesses reopening with capital that is older or simply isn’t suited to a post-pandemic world.

But the evidence base is still evolving, and the answer isn’t clear-cut.

The ongoing impact of COVID-19 offers one of the more compelling explanations. Amid another wave of infections, and with vaccination rates declining, sickness is again on the rise. There is some evidence suggesting that COVID-19 can affect post-infection productivity. And with long COVID, which is estimated to affect 5% to 20% of individuals who were infected with COVID-19, individual impacts can be pronounced.

While the population-wide impacts on productivity are unclear, a bigger push on COVID-19 vaccinations has plenty of potential upside.

Working from home

Another common theory is that working from home is dragging on productivity. Hybrid and flexible work have become much more common since the pandemic. About 40% of Australians now regularly work from home.

The main concern is that the loss of face-to-face contact might be decreasing the opportunities for learning, culture, knowledge-sharing and innovation, dragging on the quality and quantity of output.

On the flip side, greater flexibility might generate positive productivity benefits. Reducing the commute time is also a benefit, but our official statistics exclude travel time from the count of “work time”, so these benefits get lost in the productivity measures.

Research on the productivity impacts of remote work is still in its infancy. While most studies find no productivity loss from hybrid work, and some find a slight increase, there is some evidence that fully remote work can be a productivity drag.

If the shift to working from home is playing a role in reducing productivity growth, improvements over time in the tooling-up and management of remote work might help diminish that impact.

All of this is to say that it pays to be “alert but not alarmed” when looking at the past year’s productivity numbers. There’s a lot of noise and not yet a clear story of emerging structural impediments to growth.

However, productivity growth over the past 15 years has been lacklustre at best, and these latest numbers should be a powerful reminder to government to grasp the nettle on productivity-enhancing reforms.

Last week’s agreement between the Commonwealth and state governments to revitalise national competition policy is a great start. When governments negotiate the big components of this reform package, they must keep their “eyes on the prize” of stronger growth in living standards.

Now that’s something these productivity champions can get excited about.

This article was written by Chair Danielle Wood and Deputy Chair Alex Robson. It was published in the Australian Financial Review on 6 December 2023.