How did the US eclipse Europe in productivity? Mass layoffs

Productivity growth is what made the world rich starting around 1800 after millennia of relative stagnation and continues to be the best ticket to improving living standards over time. US labour productivity is about 6 percent higher than at the start of the pandemic while the euro area’s is half a percent lower, which is a significant shift in affluence and economic power. Measured in dollars of GDP per hour worked (a more precise gauge of labour productivity than GDP per employee that is available only from the OECD on an annual basis), France and Germany, the two highest-productivity large economies other than the US, have now fallen 15 percent and 11 percent behind it, respectively.

Multiple stories can be told based on this chart. Some unfold over decades, such as Western Europe’s great post-World War II economic catch-up, which by the mid-1990s had pushed labour productivity well higher in France and Germany than in the US, and the information-technology-fueled US productivity recovery that followed. Others seem to reflect shorter-term policy choices, such as the divergence during and after the Great Recession as Europe muddled through a yearslong debt crisis, and the contrast in labour-market policy early in the pandemic.

The pandemic labour-market differences did not come down to laissez-faire versus the welfare state. The US government doled out trillions of dollars in temporary aid to cushion the pandemic’s blow — more as a share of GDP than other wealthy countries. A big part of that aid, the $800 billion Paycheck Protection Program, was specifically targeted at keeping workers on payrolls, although it wasn’t very effective at that.

So what the US got was mass layoffs followed by a rapid economic comeback. Productivity rose initially because both consumption and employment shifted away from the low-pay, low-productivity in-person services most affected by pandemic shutdowns. But it held up even as Americans started eating out and traveling again because restaurants and hotels weren’t able to hire nearly as fast as demand grew, forcing them to come up with labour-saving innovations. In the meantime, many laid-off restaurant and hotel workers found opportunities to upgrade to higher-pay, higher-productivity work.

“There was a silver lining to the — brutal, almost inhumane — shedding of labour in the US,” emailed Philipp Carlsson-Szlezak, global chief economist at Boston Consulting Group and co-author of the soon-to-be-published Shocks, Crises, and False Alarms: How to Assess True Macroeconomic Risk, who had during an earlier conversation inspired me to look into this topic.
European countries avoided the layoffs, he went on, “but it looks like they missed out on the learnings that came with these massive gyrations (while US stimulus also managed to protect the population via stimulus checks).”

One of these “learnings,” Carlsson-Szlezak reported based on a conversation with a hotel-chain executive, was that most guests at luxury hotels didn’t actually want the daily “turndown” service in which housekeepers turned down bed linens and left chocolates on pillows — allowing for a reduction in labour input that if anything increased the value delivered to customers. Not all productivity improvements are high-tech! Not all the service reductions in the hospitality sector since 2020 have been seen by customers as improvements, either, of course. But industrywide, inflation-adjusted spending is up 8 percent in the US since just before the pandemic, while employment still hasn’t quite recovered. That works out to a big increase in labour productivity.

Meanwhile, productivity in the German hospitality sector, which had been rising faster than in the US before the pandemic, plummeted in 2020 and recovered only part of the lost ground in 2021 and 2022.

The productivity numbers used here are all built around GDP, a metric that misses a lot. The US path through the pandemic was certainly much more disruptive of people’s lives than Germany’s and was accompanied by big increases in violence, accidental deaths and drug overdoses. Over the longer haul, the growing US productivity edge has been accompanied by a growing disadvantage in life expectancy relative to Germany and other rich countries.

But in conjunction with pandemic aid programs, the “brutal, almost inhumane” US approach to layoffs seems to have raised productivity and, as the resulting wage gains were highest for those with lower incomes, both boosted living standards and reduced inequality. The productivity gains probably can’t all be chalked up to layoffs: An analysis last month by Goldman Sachs economists Giovanni Pierdomenico and Joseph Briggs ranked “cross-country differences in post-pandemic labour market dynamics” No. 3 — behind pre-existing productivity trends and measurement differences that may exaggerate per-hour US productivity growth — among the causes of US productivity outperformance since 2019. Still, it looks as if the sloppy American way of dealing with a historic labour market shock had its merits.

Credit: Bloomberg