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Productivity is finally looking up, and the gains could lift growth

  • 19 May 2021
  • 5min read

The Covid-19 crisis is accelerating a technology boom that has the potential to boost productivity across much of the world, spurring growth even in mature economies such as those of Europe and the U.S.

Whether in restaurant kitchens, on the factory floor, or at e-commerce fulfillment centers, the pandemic has sped the adoption of robots, artificial intelligence, and other technologies that, in theory, free workers from manual or repetitive tasks to focus on higher-value output. At the same time, cloud computing and videoconferencing software have enabled the shift to work-from-home at countless companies around the globe. That’s liberated employees from the wasteful time-suck that is the office commute and is said to be yielding dividends for businesses.

Research published by the McKinsey Global Institute at the end of March found that the combination of these trends could raise productivity growth in the U.S. and Western Europe by about 1 percentage point annually in the years to 2024, more than doubling the pre-pandemic rate of growth. This could translate into increases in gross domestic product per capita, ranging from about $1,500 in Spain to about $3,500 in the U.S., according to the report’s authors. “This acceleration in technology is something that feels real and lasting,” says Jan Mischke, a partner at the McKinsey Global Institute. (Except where noted, the term “productivity” is used here as a shorthand for what’s often called labor productivity, which is a measure of output per unit of labor input.)

Pandemic-related productivity acceleration
Data: McKinsey

Goldman Sachs Group Inc. economists are also bullish. They estimate in an April 25 report that three channels of tech disruption—the shift to e-commerce, digitization of the workplace, and the reallocation of human and investment capital as unprofitable companies shrink or close—will lift U.S. productivity by at least 2% cumulatively by 2022 relative to trend, and potentially by as much as 7%.

These are bold predictions, especially as they run counter to what’s been observed historically. Recoveries from recessions and natural disasters are typically followed by years of weak productivity growth, says Gene Kindberg-Hanlon, an economist at the World Bank. Previous epidemics, such as Ebola and SARS, left lasting negative legacies on productivity growth largely because they depressed capital spending, meaning businesses weren’t investing in equipment or information technology that might help workers do their jobs more efficiently.

The opposite appears to be happening during this pandemic. Three-quarters of the almost 1,400 executives surveyed by McKinsey in December expected investment in new technologies to pick up in 2020-24, compared with 55% that increased outlays in 2014-19.

survey by Swiss engineering giant ABB Ltd. of more than 1,600 businesses globally found that 8 out of 10 workplaces will introduce or increase the use of robotics and automation in the next decade, with 85% saying Covid had been a game changer for their business.

In North America, purchases of robots jumped 64% in the fourth quarter of 2020 from a year earlier, according to the Robotic Industries Association. Even more notable: Industries including food processing, consumer-goods manufacturing, and life sciences logged a bigger increase in orders for all of 2020 than did automakers, which have traditionally been the biggest buyers of robots.

Researchers at Oxford Economics say their 2019 forecast that robotization would add $5 trillion to global GDP by the end of the current decade may need to be revised upward.

John Ha, founder and chief executive officer of Bear Robotics, a Redwood City, Calif., startup that’s backed by SoftBank Group Corp., says his autonomous robots can perform tasks like ferrying food and dirty dishes between a restaurant kitchen and the dining area, allowing human waitstaff to interact more with their customers. “Robots free up the server’s time,” he says. “They can truly focus on hospitality.” Bear’s Servi bot has already been deployed at Denny’s restaurants in Japan and at food concessions at Houston’s Toyota Center arena that are managed by Levy Restaurants.

When Covid work-from-home restrictions made it tough for employees at a government agency in Hong Kong to create the maps and drawings of the city’s buildings that they need for city maintenance and planning, Insight Robotics Ltd. adapted its AI-powered analytics technology—usually used for wildfire detection—to automate the process. Staff who used to spend hours sketching drawings are freed to spend more time analyzing the data they need, says Rex Sham, co-founder of the Hong Kong-based company: “They don’t need to do something that treats them as human robots, and they can utilize their brain to do something more creative and valuable.”

On the remote-work front, a study published last month by Jose Maria Barrero of the Instituto Tecnológico Autónomo de México, Nicholas Bloom of Stanford, and Steven Davis of the University of Chicago Booth School of Business and the Hoover Institution found that working from home will lift productivity in the post-pandemic U.S. economy by 5%, mostly because of the reduction in commuting. The authors polled more than 30,000 U.S. workers and found that a better-than-expected experience, technological innovations and investments, and lingering fears of crowds and contagion will bolster the new working arrangements—though they also noted that those gains will mostly be realized by higher-income earners. “The obvious thing is there will be lots of adoption of automation,” Bloom says. “But I think less obvious is we are going to see a big change of direction towards making work-from-home remote connectivity much more powerful.”

One point on which there’s broad consensus among economists is that not all industries or workers will benefit from these technologies equally—and some may actually lose out. The differentiated impact means productivity improvement realized at the company or industry level may not add up to gains in national gauges.

“The real potential for a revolution is working from home,” says Robert Gordon, a professor at Northwestern University. Gordon, whose 2016 book The Rise and Fall of American Growth argued that present-day technologies such as the iPhone and the internet have been far less transformative than previous innovations like refrigeration or indoor plumbing, is quick to add a caveat: “But it’s going to take a long time for the economy to adjust in the areas that are being severely damaged by working from home, like public transit and downtown office buildings.”

Similarly, some nations may be more advantaged than others. In the U.S., the pace of increase in total factor productivity—a measure that explicitly accounts for the effects of technological innovation—climbed from an average of 0.6% from 1990 to 1995 to almost 2% on average from 1996 to 2004, powered largely by computerization and the internet, says the World Bank’s Kindberg-Hanlon. Yet productivity growth in Europe trended down in the same period for reasons that included a slower adoption of new information technology and more restrictive labor markets.

“While many advanced economies are well-placed to see productivity improve in some sectors, many emerging and developing economies may struggle to reap these benefits due to skill shortages, lack of infrastructure such as high-speed internet and other facilitators of digital connectivity, and poor access to finance,” he says.

Optimism about a productivity boost may be tempered once we have a better understanding of the scale of economic wreckage left by the pandemic, says John Van Reenen, the Ronald Coase Chair in Economics at the London School of Economics. “There will be some productivity benefits,” he says. “Will that be big enough to outweigh all the costs? The jury is still out.”

—With Grace Huang and Coco Liu.
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©2021 Bloomberg L.P

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