Investments in human capital may have to return to the agenda of the day – 03/27/2023 – Cecilia Machado

Labor productivity —the amount of output generated per unit of work— is an important economic performance indicator that captures how efficiently this input is used in the production of goods and services.

A productivity gain means that the same good or service can be produced with less work or that more goods and services can be produced with the same amount of work.

For example, productivity gains in the US economy from 1947 onward allowed the production of goods and services to multiply by a factor of 9, whereas the total number of hours worked increased only modestly, multiplied by a factor of 2.

For companies, productivity gains materialize in investment opportunities and higher returns. For workers, increased productivity allows wage gains or possibilities for improvements in working conditions. For individuals in general, it represents the expansion of consumption possibilities.

During the pandemic, the adoption of new technologies, remote work and the reconfiguration of sectors and activities to meet new consumer demands represented a major change in the functioning of the job market, bringing real prospects for gains. During this period, productivity actually increased. But recent data show those gains are reversing.

In the United States, labor productivity, which grew by 4.4% in 2020 and 2.2% in 2021, shrank by 1.7% in 2022, pushing the average productivity growth in the period (1.6%) to a number closer to the average observed in the previous decade (1.1% between 2010 and 2019).

In Brazil, labor productivity, which also grew during the pandemic, is around the same level as in 2019 and all gains observed in 2020 have been returned. But it would be somewhat surprising if these productivity gains, based on technology and process innovation, were only temporary.

Part of the reversal stems from a mechanical effect of the recomposition of employment in the less productive sectors that were most impacted by social distancing policies, as is the case of the hospitality, transport and services provided to families. During the pandemic, employment in these segments was drastically reduced, while the reorientation of consumption from services to goods and the resilience of the economy precisely in its most productive sectors supported the aggregate gains.

Employment variations between sectors with different productivity levels during the pandemic were largely responsible for the increase in productivity in the period. And this composition effect dissolves as the other sectors recover.

In addition, the strong demand for labor —whether in the United States, where there are almost twice the number of vacancies per worker looking for a job, or in Brazil, where unemployment has reached levels close to 2015 and is, possibly, below our natural rate of unemployment— makes it plausible that less qualified individuals, who would not find a job if the circumstances were different, enter the labor market, compressing labor productivity through this other channel.

It is still too early to know whether the productivity gains resulting from the use of new technologies and changes in work arrangements during the pandemic have permanent effects that are being overshadowed by the effects of sectoral composition and an artificially stimulated labor market, but the current A reduction in labor productivity has important implications for the dynamics of wage appreciation.

Productivity gains are key to sustaining wage increases without cost pressure, as the cost of labor per unit of output rises with wages but decreases with gains in labor productivity.

If the gains in labor productivity achieved during the pandemic are dated, investments in human capital and professional qualification, which are other ways in which labor productivity increases, will need to quickly return to the agenda of the day.

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