Effect of Covid-19 on global productivity
Severe epidemics such as COVID-19 can cause persistent damage to productivity through weaker investment and trade, erosion of human capital, slowing momentum in labor reallocation to high-productivity sectors, and heavy debt burdens. Epidemics that occurred since 2000 have lowered labor productivity by a cumulative 4 percent after three years, due to elevated uncertainty and mainly through their adverse effects on investment and the labor force. Moreover, the convergence of productivity of non-advanced economies to advanced economies may be slowed down by Covid-19.
The COVID-19 pandemic may have a significantly worse impact on productivity than other natural disasters for three reasons:
1) Global reach: The increased integration of the global economy, through trade and financial linkages will amplify the adverse impact of COVID-19.
2) Contagion prevention and physical distancing: Severe capacity underutilization lowers TFP while restrictions to stem the spread of the pandemic remain in place. Disruptions to employment, schooling and other education while restrictions remain in place will also lower human capital and labor productivity.
3) Compounding financial stress: Financial crises tend to result in especially protracted labor productivity losses.
There are however some potential mitigating factors. In some dimensions, pandemics and epidemics can accelerate productivity-enhancing changes. They can encourage investment in new and more technologically advanced capital and to train more highly skilled workers. They may also lead to new opportunities for green growth with environmentally friendly new investment. The mitigation measures of COVID-19, including social distancing, may encourage investment in more efficient business practices, including robotics and other digital technologies such as artificial intelligence.
Link to the book and the data here.
Paola Di Casola*
Posted by Maria Perrotta Berlin
*The opinions expressed in this post are the sole responsibility of the author and should not be interpreted as reflecting the views of Sveriges Riksbank.