Defining productivity in a pandemic may teach us a lesson

How should we measure the contribution of a teacher or a health worker during this crisis asks  DIANE COYLE in The FT 

One “P” word has been dominating economic policy discussions for some time now: not “pandemic”, but “productivity”. Now that coronavirus has dealt an unprecedented blow to economies everywhere, policymakers are asking how it will affect productivity at a national level. 

The long-term effects of Covid-19 are unknown — they depend on the length of time for which economic activity will have to be suspended. The longer lockdowns last, the greater the hit to output growth and increasing unemployment. 

Productivity — the output the economy gains for the resources and effort it expends — matters because it is what drives improvements in living standards: better health; longer lives; greater comfort. Investment, innovation and skills are the key ingredients, though the recipe is still a mystery.  

In the UK, the pandemic will certainly cause a short-term fall in private-sector productivity. This is not only because many people are unwell or struggling to work at home around children and pets, but also because of a sharp decline in output. Employment is falling too, but many businesses are keeping workers on their books so labour input will not decline by as much. In general, productivity falls when output falls. 

In the public sector, measuring productivity is hard. For services such as health and education, the Office for National Statistics looks at both activity and quality — such as the number of pupils and their exam grades, or the number of operations and health outcomes. But, at the best of times, these measures depend on other factors. 

How should we think of the productivity of a teacher preparing lessons for online delivery, with all the challenges that involves, and what will be the effect on pupils’ attainment? It is easy to think of new measures, such as the number of online lessons delivered, but hard to imagine pupil outcomes not suffering. 

As for medical staff, who would argue their productivity has not rocketed in recent weeks? But for many patients the outcomes that are measured will sadly be tragic. The biggest “productivity” boost may come from a new vaccine. 

Public investment in infrastructure or green technologies will ultimately help productivity, but financial pain may force businesses to retrench. Business investment in the UK has been sluggish anyway, falling in 2018 and rising just 0.6 per cent in 2019. It is hard to foresee anything other than a big fall from the £50m-or-so-a-quarter last year. 

Will supply chains unravel? The division of labour and specialisation that comes with outsourcing has driven gains in manufacturing productivity since the 1980s, but it depends on frictionless logistics and freight. Keeping that system going through lockdowns will take significant international co-ordination, which seems unlikely. 

Some recent work suggests that even quite small shocks can cause networks to fall apart. This one will reverberate as waves of contagion hit countries at varying times. One res­ponse would be for importing companies to diversify supply chains. A less benign one — in productivity terms — would be a shift to reshoring production at home. 

The pandemic and its aftermath will raise profound questions. Productivity involves a more-for-less (or, at least, more-for-the-same) mindset — hence the just-in-time systems and tight logistics operations. Companies may rethink the need for buffers as economic insurance. Inventories could rise, increasing business costs. Suppliers closer to home could be found, again at higher cost. 

Perhaps the definition of economic wellbeing will also change. Conventional economic output matters, as people now losing their incomes know all too well. But so do social support networks and fair access to services. Without them, everyone is more vulnerable. Prosperity is more than productivity.