The Bureau of Labor Statistics of the U.S. Department of Labor is the principal Federal agency responsible for measuring labor market activity, working conditions, and price changes in the economy.
Will the COVID-19 pandemic reduce potential
The coronavirus disease 2019 (COVID-19) pandemic derailed investment, employment, and productivity, thus
decreasing output in the United States. As the U.S. economy recovers, economists are asking whether potential
output will catch up to the previous output level. In a recent working paper titled “The impact of COVID on potential
output” (Federal Reserve Bank of San Francisco, Working Paper 2021-09, March 2021), economists John Fernald
and Huiyu Li analyze changes to capital, labor, and the allocation of those two inputs to research how COVID-19
has affected output. They also consider risks that could reduce output.
To measure potential output, the authors study how capital and labor inputs were being used before and how they
are used after the COVID-19 recession. Labor inputs include both hours and labor quality because various labor
variables affect output.
To compare a prepandemic to a COVID-19 trajectory of potential output, the authors use a benchmark average
growth rate of 1.55 percent from 2004 to 2018. The authors calculate that in the short term, output will be reduced
by about a percentage point before returning to a postpandemic normal. The pandemic slowed growth by reducing
business investments. The authors argue that the decline in capital was disguised because businesses needed to
repurchase existing equipment so that their employees could telework.
The labor supply suffered shocks in both the short and long term. In the short term, school and daycare closures
forced parents, mainly mothers, to opt out of the labor force. Potential output is reduced if the parent does not
return to the labor force. Students suffer from school closures because their educational attainments are reduced.
The authors cite work from Fernald, Li and Ochse, who found that labor inputs would be reduced by 0.5 percent in
the long run, which would reduce potential output until the affected cohort retires. Business closures and early