COVID-19’s impact on sectoral productivity: short-term fixes or long-term changes?

Since the global financial crisis of 2008, many developed and developing countries have experienced sluggish aggregate productivity growth. This trend was further exacerbated by the COVID-19 pandemic, which disrupted business operations, accelerated the adoption of technology, and motivated shifts in workers’ behaviour. In the short-term, productivity fell widely, as output plummeted faster than adjustments in labour inputs.

While progress has been made in moving past some of the challenges of the COVID-19 pandemic, as new data has become available, we can now have a better understanding of the performance of sectors during and in the aftermath of the pandemic.

This article draws on data from the 2024 Innovation Report and delves into the impacts on productivity growth and the economy’s structure across five countries: France, Germany, Switzerland, the UK and the US. The data reveals that recovery has been driven by knowledge-intensive services and the manufacturing sector, which are likely to steer future productivity growth. Will these trends be sustained in the long-term, or are they just temporary changes?

The impact of the COVID-19 pandemic on productivity growth

The economies analysed saw significant drops in productivity in 2020, except for the US (Chart 1.2). However, there was a strong recovery in all these economies in 2021. The UK experienced the most significant decline in 2020 (-9.2%), but it also had the fastest productivity growth in 2021 (8.8%), which helped it to come closer to the pre-pandemic levels (in real terms).

Productivity is calculated as a ratio of output and inputs. Therefore, changes in either of these measures can cause faster or slower productivity growth. During the pandemic, the declines in output occurred faster than the changes in labour inputs across various sectors and economies. This explains the significant drops in productivity growth in 2020.

Although these figures offer useful insights into overall trends, it is important to approach the analysis of this data with caution due to the challenges posed by the COVID-19 pandemic for data collection and business activity. These challenges have impacted the quality and consistency of productivity measures.

The positive productivity growth (4.1%) experienced by US in 2020 can be partially attributed to a faster reduction in low-wage jobs and a rapid recovery in investment and capacity utilisation, reaching above pre-pandemic levels in Q4 2020. However, the distinct accounting treatment of furlough schemes and the related implications for the relationship between employers and employees also influenced these measures.

In the US, support was provided to employees, whereas in countries such as France and the UK, it was channelled to employers. Although this latter approach led to an increase in labour costs and a subsequent decrease in productivity metrics, it proved effective in preserving employment relationships and bolstering the resilience of businesses.

Chart 1.2 shows how the US experienced reductions in employment or slower growth compared to the other economies. This may reflect the different treatment of furlough schemes, which did not reflect as a cost in value added but had a negative impact on employment.

Among the European economies studied, Switzerland had the strongest performance. Lower dependence on the hospitality sector and a robust chemical and pharmaceutical industry partly explain this performance.

Impacts across economic sectors

Due to their reliance on interpersonal interactions, the hospitality, arts and entertainment industries were hit hardest by the pandemic. This impact is reflected in productivity trends. In 2020, there were significant declines in productivity among sectors such as accommodation and food service activities, arts, entertainment, recreation, transportation and storage, and administrative and support services. However, these sectors have bounced back relatively quickly in 2021, although their productivity levels remain lower than those seen before the pandemic.

In contrast, knowledge-intensive services and manufacturing experienced among the fastest productivity growth between 2019 and 2021 (Chart 1.3). Switzerland led the productivity growth in the manufacturing sector at 17.8%, followed by the UK at 9.7% and the US at 8.8%. The US (13.6%) and the UK (12.2%) also experienced the fastest growth in information and communication, along with professional, scientific, and technical activities (US, 15.1%; UK, 6.5%), closely followed by Switzerland (6.3%). In financial and insurance activities, the fastest productivity growth was observed in Switzerland (10.2%), US (9.8%), and Germany (7.1%).

Differences in how sectoral productivity grew between 2019 and 2021 were identified. Sectors such as information and communication, financial and insurance activities, and professional, scientific and technical activities witnessed simultaneous expansions in both value added and employment. Consequently, the growth in labour productivity growth was the result of faster expansions in value added than in employment.

In contrast, the rapid productivity surge observed in the manufacturing sector in 2021 is explained by a combination of increased value added and reduced employment levels (Chart 1.4). Manufacturing industries that saw among the fastest productivity growth in 2021 across the five economies analysed include textiles, wearing apparel, leather and related products; computer, electronic and optical products; pharmaceuticals; machinery and equipment; basic metals; and transport equipment.

Changes in the structure of the economy

As we have demonstrated in our previous research, the structure of an economy, —the size of its different economic sectors— influences productivity growth. Sectors such as finance, mining, information and communication, and manufacturing typically exhibit above-average levels of productivity and experience faster productivity growth.

The extent to which an economic sector contributes to aggregate productivity growth depends on both the pace of sectoral productivity growth and the size of each sector. The disruptions caused by the COVID-19 pandemic and the related responses triggered changes in the economic structure of the examined economies.

As illustrated in Chart 1.6, knowledge-intensive services, such as information and communication, financial and insurance activities, and professional, scientific, and technical activities, expanded their contributions to the economy during and in the aftermath of the pandemic. In the UK, for instance, these sectors together accounted for an increase of 0.4 percentage points in employment shares and 1.8 percentage points in value added shares between 2019 and 2021.

In contrast, low and high-tech manufacturing witnessed reductions in its relative size. This results from slower value added growth compared to that observed in knowledge-intensive services and absolute reductions in employment. These figures should be interpreted in the context of both temporary layoffs and labour shortages. The latter were already prevalent in 2019 and were exacerbated by the COVID-19 pandemic.

In 2020 and 2021, many workers left the manufacturing sector, some due to early retirement and others moving to a different industry. In 2022, Make UK’s Executive Survey found that 87% of the manufacturers consulted were concerned that employees would be leaving their business and 84% leaving the industry altogether. However, this trend appears to have reverted in 2022.

Switzerland stands out as an exception in the reduction of the shares of manufacturing in the economy. Its medium/high-tech manufacturing sector recorded an expansion in its value added in both absolute and relative terms. This upturn was primarily underpinned by the fast growth (of the chemical and pharmaceutical industry, which also increased its gross value added in the other economies under analysis.

Short-term fixes or lasting transformations?

As new data emerges, we can gain initial insights into whether the changes observed in knowledge-intensive services and manufacturing during 2020 and 2021 are transient adjustments or will result in long-term transformations.

Recent data shows the information and communication sector has maintained a positive trend in 2022 (Chart 1.5). Growth in this industry has primarily been driven by computer programming and data processing activities.

Except for Switzerland, the professional, scientific, and technical services also maintained a positive, albeit slower, trend in 2022. This upward trend is expected to continue in both Europe and the US over the next decade. Switzerland’s decrease in value added is possibly signalling a return to a ‘normal’ performance following rapid growth between 2019 and 2021. Conversely, the UK, witnessed continued expansion in 2022, albeit at a slower pace. The expansion of this sector was mainly driven by the growth in head office management and consultancy activities.

The financial and insurance sector saw a substantial decline in growth in 2022, with negative value added rates observed in France, Switzerland and US, alongside modest expansions in employment. Germany stood out for its relatively stronger value added growth in this sector (4.2%).

Several countries have launched strategies to strengthen their manufacturing sectors, signalling an intention to expand this industry in the future. In 2022 expansions in employment were observed in all economies analysed. In terms of value added, Switzerland (6.8%) led the growth, largely supported by the performance of its chemical and pharmaceutical industries. In contrast, the UK recorded negative rates (-3.3%) with the largest falls (in absolute terms) observed across machinery and equipment, transport equipment and basic metals and metal products.

Final reflections

The COVID-19 pandemic disrupted business operations, accelerated the adoption of technology, and motivated shifts in workers’ behaviour. expanded their employment and value added contributions to the economy, also experiencing faster productivity growth across the five economies studied

The COVID-19 pandemic caused significant disruptions to business operations and prompted many companies to adopt and embrace new technologies. This shift also led to changes in the behaviour of workers. In the short-term (2020 ̶ 2021), knowledge-intensive services, such as information and communication, financial and insurance activities, and professional, scientific, and technical activities witnessed growth in employment and value added contributions to the economy. Additionally, these industries experienced a faster rate of productivity growth across the five economies studied.

In the long-term, it is likely that these sectors will maintain their positive trajectory, albeit at a slower pace. Knowledge-intensive services, with the exception of financial and insurance activities, experienced growth throughout 2022.

Although the manufacturing sector witnessed robust productivity growth in 2021, this was accompanied by reductions in its size, particularly in terms of employment. However, it appears that initiatives aimed at addressing skills shortages and supporting the manufacturing sector more broadly are beginning to have a positive impact. This is evidenced by the increase in manufacturing employment seen in 2022.

Future editions of the UK Innovation Report will continue to monitor developments in sectoral productivity to determine the extent to which the expansions in knowledge-intensive services and the manufacturing sector will be sustained in the long-term.