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A New Interpretation of Productivity Growth Dynamics in the Pre-Pandemic and Pandemic Era U.S. Economy, 1950-2022

The dismal decade of 2010-19 recorded the slowest productivity growth of any decade in U.S. history, only 1.1 percent per year in the business sector. Yet the pandemic appears to have created a resurgence in productivity growth with a 4.1 percent rate achieved in the four quarters of 2020. This paper provides a unified framework that explains productivity growth in both the pre-pandemic and pandemic-era U.S. economy. The key insight is that in their panicked reaction to the collapse of output in the 2008-09 recession, business firms overreacted with “excess layoffs,” adjusting hours to the output decline with a far higher elasticity than normal. Our regression analysis, which allows post-recession rehiring that gradually unwinds the excess layoffs, explains why productivity growth was countercyclical in 2009 and why it was so slow in 2010-16 as rehiring boosted hours growth. Post-sample simulations explain why productivity growth was so high in 2020 and why it fell to only 0.6 percent in the five quarters of 2021-22. The paper includes implications for the future long-term evolution of productivity growth in the business sector and total economy. A new data file on quarterly productivity levels and changes for 17 industries provides new perspectives for 2006-22 and particularly for the nine pandemic quarters of 2020-22. Positive pandemic-era productivity growth can be entirely explained by a surge in the performance of work-from-home service industries, while goods industries soared and then slumped, while contact services recorded strongly negative productivity growth throughout 2020-22. only our understanding of productivity behavior during 2007-19 but can also be applied to the pandemic era of 2020-22. A post-sample simulation of the 2007-19 hours equation can explain the 2020-22 pandemic-era behavior of hours and productivity almost exactly. The rapid growth of productivity in 2020 is explained by the same pattern of excess layoffs as in 2008-09, but with a faster adjustment due to the shorter duration of the 2020 recession. The marked slowdown of productivity growth from 4.0 percent in 2020 to 0.6 percent in the five quarters of 2021-22 is explained by a repeat of the post-recession rehiring recovery that occurred after 2009.