Recessions and total factor productivity: Evidence from sectoral data

Area of Science:

• Economics
• Macroeconomics
• Productivity Studies

Background:

• Concerns exist about declining productivity, exacerbated by the COVID-19 crisis.
• The relationship between recessions and total factor productivity (TFP) is theoretically uncertain.
• Historical productivity levels were already low prior to recent economic shocks.

Purpose of the Study:

• To empirically investigate the dynamic effects of recessions on total factor productivity (TFP).
• To quantify the short- to medium-term impact of recessionary shocks on productivity.
• To analyze the long-term consequences of recessions on the level of TFP.

Main Methods:

• Calculated a novel measure of utilization-adjusted productivity.
• Utilized data from 24 industries across 18 advanced economies (1970-2014).
• Employed the local projection method to analyze dynamic impacts of shocks.

Main Results:

• Deep recessions result in a permanent decrease in the level of total factor productivity.
• The negative impact on TFP is driven by heightened resource misallocation.
• Recessionary shocks have lasting effects on productivity levels.

Conclusions:

• Recessions, particularly severe ones, inflict lasting damage on national productivity.
• Increased resource misallocation during downturns is a key mechanism behind TFP deterioration.
• Policy interventions may be needed to mitigate the long-term productivity losses from recessions.