Guest editorial: Why is labor productivity decreasing? Don’t fret, but keep an eye on factors

Published 9:10 am Friday, July 28, 2023

By Mike Walden

N.C. State University


One of the underappreciated measures of the economy is worker productivity, which simply measures how much a worker accomplishes — called output — in a given period of time, usually an hour.

When worker productivity increases, it means workers are becoming more efficient — that is, they are producing more output in an hour. More productive workers are therefore more valuable to a business. Usually, more productive workers are paid more, either in wages or in benefits.

This is why alarm bells recently sounded when government numbers showed worker productivity declining. Between mid-2021 and mid-2023, worker productivity slipped by 2%. There’s never been a comparable drop in the last seven decades.

The big question among economists and others is why? What happened in the economy to cause worker productivity to erode?

There’s no shortage of potential answers. Among them are a loss of education during the pandemic that reduced workers’ skills; workers suffering from stress related to inflation and the pandemic; a change in attitudes about work, particularly among younger workers; the movement of workers to new jobs during and after the pandemic; and the rise of remote work. There’s also a counterargument that recent labor productivity looks bad only because productivity surged during the pandemic.

Let’s look at each of these possibilities individually. There’s no question that reduced educational outcomes are related to reduced skills and lower worker productivity. Data show that pre-college students did lose educational progress during the pandemic. Those who moved into the workforce without recovering these losses could have adversely impacted labor productivity.

It’s also accepted that stress can harm a worker’s performance on the job. Several studies have found that workers facing more stress in their lives are less productive. If worries over the pandemic created more apprehension among workers, then it is logical to conclude that worker productivity suffered.
Younger workers are often initially less productive than older counterparts because younger workers must learn the details of the job. But there’s little specific evidence showing this relationship has become worse with current generations.

A tremendous amount of  job churning took place during and after the pandemic as large numbers of workers moved from job to job. During the worst of the pandemic in the first half of 2020, there were forced layoffs due to the closure of a large segment of the economy. The unemployment rate soared to 14%.
But as the economy reopened in the second half of 2020, and throughout 2021 and 2022, many workers found they could have their pick of jobs. Job openings were increasing faster than available workers, resulting in an unprecedented labor shortage. As many as 4 million workers each month were changing jobs, often due to higher pay.

Ordinarily, economists have found switching jobs results in higher labor productivity since the change presumably provides a better match between a worker’s skills and the needs of the job. But with so many firms desperate to hire workers during the last two years, the share of productivity-enhancing job switches likely suffered.

The last factor on the list of changes that could be responsible for falling labor productivity is perhaps the most controversial: remote work. Remote work means there’s an agreement between the worker and employer allowing some part of the work to be done away from the site of the company. Prior to the pandemic, remote workers made up less than 10% of the workforce. The pandemic pushed the remote work rate to 60%. Today’s remote work rate of 40% is still far above the pre-pandemic level.

For labor productivity, the worry is without direct supervision, remote workers may slack off and not accomplish as much. Also, in occupations where collaboration with co-workers is important, the lack of face-to-face contact may impede productivity. But if remote work makes workers happier — especially with their work/life balance — remote work may enhance worker productivity.

Is there any evidence that remote work is bad for productivity? Current research findings suggest the answer depends on the type of remote work. Fully remote work, where all work is done away from the business, has been found to reduce labor productivity by 10% to 20%. But hybrid remote work, meaning a mix of off-site and in-office work, has been found to increase productivity by 5% to 15%. Currently, three times more individuals are hybrid workers than fully remote workers.

There’s one more possibility to consider, which is that there actually is no labor productivity problem. The drop in labor productivity began in the second half of 2021. But there was a surge in labor productivity during all of 2020 and in the first half of 2021, when many workplace restrictions were still in place. Fewer workers were asked to do more, which resulted in a jump in productivity.

In fact, despite the retreats in labor productivity in 2021 and 2022, labor productivity is significantly higher today than during the pre-pandemic year of 2019.

So, is all of our worry about labor productivity for nothing? I don’t think so. Even if we don’t have a problem now, it’s still important to continue focusing on the factors behind labor productivity so it doesn’t become a problem in the future. But, as always, you decide.

Mike Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.