Will COVID accelerate productivity growth?

The COVID-19 pandemic has prompted an increasing number of rich-country firms to reduce their reliance on global supply chains and invest more in robots at home. But it is probably too soon to tell whether this switch will increase productivity growth in advanced economies.

By: Date: February 10, 2021 Topic: European Macroeconomics & Governance

This opinion piece was originally published in Project Syndicate.

Since the mid-2000s, productivity growth in advanced economies has been anaemic. Average annual productivity growth in the United States from 2005 to 2016 was just 1.3%, less than half of the 2.8% annual growth rate recorded between 1995 and 2004. Across other OECD countries, annual productivity growth declined from 2.3% in the 1995-2004 period to 1.1% between 2005 and 2015.

This sluggish growth appears paradoxical, given recent rapid advances in digital innovation and artificial intelligence. As Erik Brynjolfsson, Daniel Rock, and Chad Syverson have noted, “we see transformative new technologies everywhere but in the productivity statistics.” But might the COVID-19 pandemic help to resolve the paradox by accelerating firms’ adoption of robots and other labour-saving innovations, thereby boosting productivity growth?

Recent research that I co-authored shows that the pandemic has prompted an increasing number of rich-country firms to reduce their reliance on global supply chains and invest more in robots at home. This is because the pandemic has changed the relative costs of these two production models. Global supply chains have become costlier and more uncertain, with many firms anticipating further lockdown-related disruptions to production. At the same time, the decrease in interest rates during the ongoing economic crisis has enabled cheaper financing, thereby lowering the cost of a robot relative to that of a worker.

As a result, firms in developed countries are expected to reshore production – from China, for example – and invest in German or US robots instead. We estimate that the increase in uncertainty owing to the pandemic could reduce global supply-chain activity by 35%. That decrease, coupled with lower interest rates, could boost robot adoption in rich countries by 76% (although here, too, rising uncertainty could deter investment).

Whether the switch from supply chains to robots increases productivity growth in advanced economies will depend on whether robots create larger productivity gains than offshore workers do. Fortunately, we have empirical evidence that could point toward an answer.

Offshoring production to China or Eastern Europe increased developed-country firms’ productivity, because wages in these regions were much lower than at home. For example, German companies’ use of Eastern European rather than German workers in parts of their supply chains resulted in economy-wide productivity gains that contributed to Germany’s “super-competitiveness.”

Estimating the productivity gains from introducing robots is far trickier, because the outcome depends on whether firms use the robots simply to replace workers, or instead reorganise production in order to exploit the potential that AI offers. Doing the latter can create entirely new jobs that foster rapid productivity growth.

But recent research by Daron Acemoglu and Pascual Restrepo suggests that US firms nowadays use robots primarily to automate tasks previously performed by workers rather than to create new jobs. They found that between 1947 and 1987, labour displacement as a result of automation was offset by reinstatement of labour into new jobs created by other new technologies. In the last three decades, however, worker displacement has far outpaced reinstatement. As a result, the labour share in US GDP (the share of income that goes to workers) has been declining since the mid-1980s. Firms’ focus on automation may explain why productivity growth has been so anaemic in recent years, despite the AI revolution.

Moreover, studies of technological innovation suggest that there is a long implementation lag until a new technology’s potential is fully revealed. Applying new technologies takes considerable time, and the more profound and far-reaching the potential restructuring, the longer the time lag between the initial invention and the complete economic impact. The full benefit of the technology often requires time-consuming complementary investments, such as organisational changes.

These findings suggest that the pandemic will not start to accelerate productivity growth anytime soon. That in turn has important implications for the future of world trade. In the period of hyper-globalisation from 1990 to 2008, global supply chains accounted for , as rich-country firms relocated production to Eastern Europe and China in order to benefit from lower labour costs. They then imported the inputs manufactured in these regions to their home market, boosting growth in trade in intermediate goods.

Supply-chain disruption and reshoring will likely slow world trade unless productivity growth accelerates in advanced economies. If the adoption of robots increases rich-country firms’ productivity, they will become more competitive and produce more. They will thus import more intermediate inputs from developing countries.

The World Bank’s Erhan Artuc, Paulo Bastos, and Bob Rijkers argued along these lines in a 2018 paper that presented a more optimistic outlook for world trade. But another recent study shows that robot adoption in the US has led firms to withdraw supply chains from Mexico, eliminating some jobs that previously had been offshored there.

The COVID-19 pandemic has had a large, abrupt, and measurable impact on the global economy and firms’ business models. But its effects on productivity growth, possibly highly significant, will take longer to judge.

Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic

Blog Post

A world divided: global vaccine trade and production

COVID-19 has reinforced traditional vaccine production patterns, but the global vaccine trade has changed considerably.

By: Lionel Guetta-Jeanrenaud, Niclas Poitiers and Reinhilde Veugelers Topic: Global Economics & Governance Date: July 20, 2021
Read article More by this author

Blog Post

The European Union’s carbon border mechanism and the WTO

To avoid any backlash, the European Union should work with other World Trade Organisation members to define basic principles of carbon border adjustment mechanisms.

By: André Sapir Topic: Energy & Climate, Global Economics & Governance Date: July 19, 2021
Read article Download PDF

External Publication

Building the Road to Greener Pastures

How the G20 can support the recovery with sustainable local infrastructure investment.

By: Mia Hoffmann, Ben McWilliams and Niclas Poitiers Topic: Global Economics & Governance, Testimonies Date: July 15, 2021
Read about event More on this topic

Upcoming Event


The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis and Alicia García-Herrero Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event

Past Event

Past Event

Financing for Pandemic Preparedness and Response

How can we better prepare for future pandemics? In this event, co-hosted by the Center for Global Development and Bruegel think tanks, speakers will present "A Global Deal for Our Pandemic Age", a report of the G20 High Level Independent Panel on Financing the Global Commons for Pandemic Preparedness and Response.

Speakers: Masood Ahmed, Victor J. Dzau, Amanda Glassman and Lawrence H. Summers Topic: Finance & Financial Regulation, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 14, 2021
Read article More on this topic

Blog Post

Fair vaccine access is a goal Europe cannot afford to miss – July update

European countries must do more to tackle the vaccine uptake gap. Vaccination data should be published at the maximum granularity level so researchers and local decision-makers can monitor progress.

By: Lionel Guetta-Jeanrenaud and Mario Mariniello Topic: European Macroeconomics & Governance Date: July 14, 2021
Read article More on this topic

External Publication

A Global Deal for Our Pandemic Age

Report of the G20 High Level Independent Panel on Financing the Global Commons for Pandemic Preparedness and Response.

By: Tharman Shanmugaratnam, Lawrence H. Summers, Ngozi Okonjo-Iweala, Ana Botin, Mohamed El-Erian, Jacob Frenkel, Rebeca Grynspan, Naoko Ishii, Michael Kremer, Kiran Mazumdar-Shaw, Luis Alberto Moreno, Lucrezia Reichlin, John-Arne Røttingen, Vera Songwe, Mark Suzman, Tidjane Thiam, Jean-Claude Trichet, Ngaire Woods, ZHU Min, Masood Ahmed, Guntram B. Wolff, Victor J. Dzau and Jeremy Farrar Topic: Global Economics & Governance Date: July 9, 2021
Read about event More on this topic

Past Event

Past Event

Strengthening the weak links: future of supply chains

What new supply chains trends will we see in the post-pandemic era?

Speakers: Ebru Özdemir, André Sapir and Guntram B. Wolff Topic: Global Economics & Governance Date: July 7, 2021
Read article Download PDF More on this topic

Policy Contribution

Commercialisation contracts: European support for low-carbon technology deployment

To cut the cost of decarbonisation significantly, the best solution would be to provide investors with a predictable carbon price that corresponds to the envisaged decarbonisation pathway.

By: Ben McWilliams and Georg Zachmann Topic: Energy & Climate Date: July 1, 2021
Read article More on this topic

Blog Post

Workers can unlock the artificial intelligence revolution

Employers and artificial intelligence developers should ensure new technologies work for workers by making them trustworthy, easy to use and valuable in day-to-day work.

By: Mia Hoffmann and Laura Nurski Topic: Innovation & Competition Policy Date: June 30, 2021
Read article More on this topic More by this author



Restarting the economy?

While the end of the pandemic is still far, the economy will have to restart.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: June 30, 2021
Read article More on this topic More by this author


What to expect from the ECB’s monetary policy strategy review?

Emphasis will be placed on greening monetary policy and clarifying the ECB's price stability objective, but is this enough?

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: June 23, 2021
Load more posts