After years of disappointing productivity growth, the Covid-19 pandemic has shaken something loose, with surveys of business executives showing most reporting increased investments in technology. The danger now is that the pandemic-era acceleration of automation and digitalization impedes growth in labor income and consumption.
With Covid-19 vaccines being rolled out and supportive fiscal and monetary policies fueling aggregate demand, the U.S. economy is poised to return to its pre-pandemic output level later this year. The labor-market recovery, however, will be much slower and unevenly distributed, with employment unlikely to return to its pre-pandemic peak until 2024.
If output growth exceeds employment growth over the next few years, productivity will increase (at least temporarily). The Congressional Budget Office’s most recent forecast predicts labor-force productivity growth of 1.5% per year for the 2021-25 period, up from an average of 1.2% per year between 2008 and 2020.
In response to the pandemic, many firms—but especially large ones—have made significant strides toward boosting productivity through automation, digitalization, and the reorganization of operations, including a rapid shift to at-home work, to boost efficiency and resilience.
In a December 2020 McKinsey & Company survey of business executives in North America and six European countries representing about 40% of global GDP, 51% of respondents said they had increased investment in new technologies in 2020, and 75% said they planned to do so in 2020-24. By contrast, just 55% reported increased investments in 2014-19. Moreover, a 2020 survey conducted by the World Economic Forum (WEF) found that 80% of firms plan to increase the digitalization of their operations and expand their use of remote work, and 50% intend to accelerate the automation of production tasks.
More broadly, recent research by the McKinsey Global Institute (MGI) identifies opportunities for incremental productivity growth across a wide variety of sectors that account for about 60% of the non-farm economy. These include health care (telemedicine), construction (digital twins and offsite modular construction), retail (e-commerce and warehouse automation), banking (digital payments and hybrid remote working), manufacturing (robots, digital channels, and connected autos), and even the hard-hit travel industry (more agile working).
If all of this potential is realized, annual labor productivity growth in the United States and several European economies could increase by about a percentage point between 2019 and 2024. But achieving such a dramatic supply-side improvement requires that the productivity-driving changes spread from the large firms where they have been concentrated to small and medium-size enterprises.
Many in this latter group have so far been unable or reluctant to increase their investment in automating or digitalizing their supply chains, operations, and delivery models. And without such investment, the productivity gap between big “superstar” firms and a long tail of lagging competitors will increase, diminishing economy-wide productivity gains and exacerbating the post-2008 trends toward greater inequality in economic performance across firms and regions and more market concentration.