The Impact of Covid-19 on Productivity

Abstract

Productivity is a key determinant of the sustainability of the public finances. While the initial impact of Covid-19 on labor productivity growth shows a surprisingly positive impact, the impact on total factor productivity (TFP) is less clear. We evaluate this with new survey data on labor and capital inputs, outputs and prices from a UK firm panel survey. We find that Covid-19 reduced private sector TFP by up to 4% during the pandemic, with a projected 1% reduction over the medium term. These numbers comprise a large reduction in ‘within-firm’ productivity as intermediate costs increased due to measures like protective equipment, screens, hand sanitizer and lower capacity utilization. This was partly offset, however, by a positive ‘between-firm’ effects as less productive sectors, and less productive firms within them, contracted. This highlights how the Covid-19 shock has had large, but offsetting, within and between firm impacts on aggregate TFP.