👋 "Hello, I must be going." Another look at the pandemic-era productivity boom — then bust.

There are good reasons to think this isn't the beginning of yet another downshift in America's productive capacity

The economic silver lining of the first two pandemic years, 2020 and 2021, was strong US productivity growth. (Econ 101 boilerplate: Almost all variation in living standards among countries is due to differences in productivity, or the amount of goods and services produced from each unit of labor input. Companies can raise wages without fueling inflation if workers become more productive.) Specifically, nonfarm labor productivity averaged over 2 percent annually during those two years, twice the rate of the post-Global Financial Crisis period of 2010 through 2019. Real-time explanations included the rise of e-commerce, companies digitizing their workplace (such as work-from-home), and the “creative destruction” of low productivity businesses going out of business. So despite all the economic pain caused by the pandemic, the outbreak seemed to have left a more efficient economy in its wake.

But maybe not. The first half of 2022 has seen a big reversal from those higher-productivity years, with annualized declines of 7.4 percent in the first quarter and 4.1 percent (upwardly revised by 4.8 percent in the initial print) in the second quarter. “The abysmal productivity readings in the first half of 2022 have cast doubt on whether the pandemic generated efficiency gains in the first place,” observes the Goldman Sachs economics team in a new research note. “At face value, this year’s GDP and employment numbers imply a full reversal of the pandemic productivity spurt.”

That would be bad, even taking into account the notorious volatility of productivity numbers, which frequently undergo substantial revision. Let’s set aside how productivity growth drives the long-term increase in living standards. A less-productive economy boosts the degree of difficulty for the Federal Reserve in managing a soft landing from the current inflation surge. This is one reason why the Biden administration described the Bipartisan Infrastructure Act, the CHIPs and Science Act, and the Inflation Reduction Act as anti-inflationary. They supposedly would boost the productive capacity of the economy, dampening inflation.

The easy, Occam's razor explanation here is one of mean reversion. Productivity growth is just returning to normal, or its longer-term baseline, after a temporary upshift. One reason GS doubts the explanatory power of that explanation: For the sectors best able to digitize, the impact of using these technologies has been ongoing. The bank points out that productivity “remains well above trend for the industries that were well-positioned to digitize the workplace, such as information technology (6.4% above trend) and professional services (5.1% above trend).”

So what are stronger explanations for the sharp reversal in the productivity data across the broad economy? Let’s have a look: