Fact of the Week: Despite Broad Business-Preservation Policies, COVID-19 Spurred Labor Reallocations That Have Raised Productivity

Source: Andrews et. al, “COVID-19, Productivity and Reallocation: Timely Evidence from Three OECD Countries,” OECD Economics Department Working Papers, July 2021.

Commentary: The COVID-19 pandemic’s unique health challenges have prompted correspondingly unique crisis policies to protect economic welfare. Whereas businesses would otherwise fail if their in-person operations were constrained for months at a time, emergency stimulus policies like the US Paycheck Protection Program and the Australian JobKeeper Subsidy have instead prioritized job protection and, in turn, business preservation regardless of a firm’s productivity. This blanket-prioritization from countries makes the economic shock inflicted by the pandemic different from other recessions. Recessions typically have a selective impact on firm redevelopment, with high-productivity businesses withstanding downturns better and consequently capturing larger shares of workers. It would have stood to reason if broader protection policies during COVID-19 distorted this effect. But new research from the Organization for Economic Cooperation and Development (OECD) finds productivity trends similar to other recessions.

Using firm-level microdata from the cloud accounting service Xero, which contains novel revenue and employment data from its 2.7 million global subscribers, the OECD modeled the relationship between employment growth and firm-level productivity for three case studies: Australia, New Zealand, and the United Kingdom. The implied difference in employment growth between high and low productivity firms from February 2020 to September 2020 was roughly 8 percent in Australia, 3 percent in New Zealand, and 5 percent in the UK. In all cases, the relationship between employment growth and higher labor productivity was statistically significant throughout both the short-term and present day (February 2021). Growing digitalization of services and business practices may play a role in ensuring this labor force transformation still occurs, given that firms leading in digital practices have been best suited to grow their workforce throughout the pandemic. Subsidizing firms during a shock certainly has its purpose, but firms most willing to innovate and adopt new technologies will still emerge successfully and evolve the economy.