Covid-19, the Great Resignation, job and economic reallocation, productivity, and “destruction without creation”

The so-called “Great Resignation” of 2021-22 saw a massive job reset due to Covid-19. Maybe more accurately called the “Great Reshuffle” as more workers changed jobs rather than simply dropping out of the labor force, this somewhat unique shift in the workforce offers us a natural experiment. Theory says that productive is increased by moving resources (such as labor) from low productive uses (firms) to higher productive uses (firms). If that is true then the movement (reallocation) of all these workers should result in higher productivity. In essence, the Great Resignation should be a manifestation of creative destruction.

However, the process of reallocation is never smooth and depends on a number of factors. To what extent are workers changing industries or changing firms in the same industry? If they are switching to similar companies, are they moving to higher productivity firms? Or are they simple moving to same productivity level firms for higher wages? If the latter, then overall productivity will be going down as labor costs go up.

And it raises a more general measurement question: how to untangle reallocation effects from productivity gains dues to adoption of productivity-enhancing technologies and management practices in firm?

It also raises questions as to the importance of types of intangibles. The theory only works if one assumes that firm-specific human capital (the skills and knowledge that workers carry with them) is less important that general human capital (ability to learn, etc.) and organizational capital (ability of firm to better utilize that human capital and to integrate workers into their organization). And that firm-specific human capital (knowing “how we do things here”) is less important if it is knowledge about a less productivity way of doing things. That is not to say that organizational capital trumps human capital. Rather, organizational capital (including good management practices) is needed to make human capital relevant.

Work by Bloom et. al is answering some questions about the impact of Covid-19 using survey data of UK companies between July 2020 and April 2022. Their analysis indicates that “reallocation between firms made a positive contribution to productivity.” This is as expected.

But overall, productivity went down. Why? Because “the pandemic will have increased intermediate costs and therefore lowered productivity within firms across countries, with the adverse effects on within firm productivity likely to have been largest in industries where it is harder for jobs to be done from home.”

They go on to explain: “The negative within [firm] effects on TFP were partially offset by positive between effects – low-productivity sectors shrank more than high-productivity sectors, and the least productive firms within these sectors suffered most. The sector result arises because the lowest productivity sectors tend to involve more face-to-face activity – travel, leisure, retail etc. – and so contracted as a share of value-added. The firm result arises because the pandemic appears to have more severely affected lower-productivity firms within sectors, in part because they struggled to deal with the need for rapid pandemic re-organization.”

Ok – but here is the real kicker: “These positive between effects on productivity, however, are not the usual Schumpeterian process of creative destruction, whereby lower productivity firms are replaced by higher productivity firms. Instead, much of this was simply a lockdown of low-productivity sectors (destruction without creation). So, while this helped to push up productivity, it reduced total economic output.” (Emphasis in bold added)

I’m not sure what this portends for the future of the UK economy (and the US economy as the authors note that the findings for the UK “gives an indication of the likely direction of the impact of Covid-19 in the US and other advanced European countries given the similar nature of the pandemic impact”). But the process of “destruction without creation” worries me. Clearly there is an economic policy issue here as to how to foster the creation process in the time of destruction. With all those people changing jobs, I would hope the reshuffling is giving rise to some creation somewhere. We need to figure out how to give that a positive boost.

See Nicholas Bloom, Philip Bunn, Paul Mizen, Pawel Smietanka, and Gregory Thwaites, “The impact of COVID-19 on Productivity,” Working Paper No. 061, Programme on Innovation and Diffusion, London School of Economics and Political Science, December 2022

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