Equally important is the trajectory for aggregate demand, which will depend on what happens to employment and income growth. The most convincing explanation for the disappointing productivity growth in the decade following the 2007-09 global financial crisis was chronically weak consumption and investment demand. While the pandemic-era acceleration of automation and digitalization may boost productivity on the supply side, it could have a detrimental effect on demand, by hampering growth in labor income and consumption—a major determinant of economic growth generally.
During the next year, consumption growth is likely to be strong, owing to the post-pandemic release of pent-up demand and massive injections of fiscal stimulus. But, over time, the effects of efficiency-focused productivity measures and accelerated digitalization could dampen employment and income growth, cause polarization within labor markets to deepen, and eliminate middle-skill jobs, thereby constraining consumption growth among those with the highest propensity to spend.
The long-run effects could be substantial. About 60% of the productivity potential identified in the most recent MGI report reflects efficiency-boosting cuts to labor and other costs. The WEF survey found that 43% of the businesses surveyed anticipate net reductions in their workforce as a result of pandemic-accelerated automation and digitalization. In a related report, MGI estimates that an additional 5% of workers (eight million) could be displaced by automation/digitalization by 2030, on top of the 22% of workers estimated to be vulnerable before the pandemic.
In the U.S. and other industrialized economies, the largest negative impact of the pandemic on jobs and incomes has been in food services, retail, hospitality, customer service, and office support. Many of these low-wage jobs could disappear altogether if pandemic-induced reductions in professional office time and business travel diminish demand for myriad services such as office cleaning, security and maintenance, transportation, and restaurant and hospitality services. Prior to the pandemic, these occupations accounted for one in four U.S. jobs and a growing share of employment for workers without a post-secondary education.
Weak investment poses another demand-side risk to potential productivity growth. Business investment rates overall were already in long-run decline before the pandemic (hence the post-2008 productivity slowdown), and investment has since contracted further, owing to a decrease in private non-residential investment from its 2019 peak. That said, the decline in investment during the Covid-19 recession has not been as large as that of the 2007-09 financial crisis.
To realize the potential for higher productivity growth, fiscal and monetary authorities should shape recovery policies with two broad goals in mind: fostering strong and inclusive income and consumption growth, and boosting public and private investment in physical capital (infrastructure and affordable housing), human capital (education and training), and knowledge (research and development).
Given the significant shortfalls in public infrastructure that have developed over decades of underinvestment, the Biden administration’s infrastructure plan could crowd in private investment, boosting overall investment in the short run and increasing the economy’s long-run potential productivity growth.
Laura Tyson, former chair of the U.S. President's Council of Economic Advisers, is Professor of the Graduate School at the Haas School of Business and Chair of the Blum Center Board of Trustees at the University of California, Berkeley.