The impact of the economic downturn on productivity growth

Labour productivity growth is an important indicator of how efficiently the economy is functioning, particularly in the longer term as an indicator of underlying economic growth potential, but also in the shorter term in that it reflects how efficiently the labour market is interacting with changes in output and production. In the recent economic downturn, productivity growth has fallen significantly, as it has in the previous three recessions in the mid 1970s, early 1980s and early 1990s. As with the last two recessions, productivity growth has fallen in line with the drop in output growth, in terms of both timing and depth, because of a lag in the response of businesses in reducing labour input as output and production has reduced. However, recent labour market data suggests that the labour market has been adjusting apace in recent months, and is likely to continue to do so, while production data suggests there is some plateauing out in the decline. This shift in the dynamics between the labour market and output growth would be expected to result in productivity growth picking up in the coming quarters. Economic & Labour Market Review (2009) 3, 18–25; doi:10.1057/elmr.2009.88