Sectoral Productivity Growth, COVID-19 Shocks, and Infrastructure

Abstract

This paper examines sectoral productivity shocks of the COVID-19 pandemic, their aggregate impact, and the possible compensatory effects of improving productivity in infrastructure-related sectors. We employ the KLEMS annual dataset for a group of OECD and Latin America and the Caribbean countries, complemented with high-frequency data for 2020. First, we estimate a panel vector autoregression of growth rates in sector level labor productivity to specify the nature and size of sectoral shocks using the historical data. We then run impulse-response simulations of one standard deviation shocks in the sectors that were most affected by COVID-19. We estimate that the pandemic cut economy-wide labor productivity by 4.9% in Latin America, and by 3.5% for the entire sample. Finally, by modeling the long-run relationship between productivity shocks in the sectors most affected by COVID-19, we find that large productivity improvements in infrastructure—equivalent to at least three times the historical rates of productivity gains—may be needed to fully compensate for the negative productivity losses traceable to COVID-19.