1. “Post-crisis productivity: Lessons from the UK”
Ana Rincón Aznar
NBP Conference: “The Mystery of Low Productivity in Europe”
Warsaw, 26th October 2018

2. Presentation based on paper by: Riley. R. , Rincon-Aznar, A. and L
Presentation based on paper by: Riley. R., Rincon-Aznar, A. and L. Samek (2018), “Below the Aggregate: An Account of the UK Productivity Puzzle”, Economic Statistics Centre of Excellence DP
“An academic centre of expertise created in 2017, and funded by the UK Office for National Statistics, with the objective of improving measurement of the modern economy, and address challenges such as the productivity puzzle’.

3. The UK productivity puzzle
In the decade prior to the financial crisis, the UK economy experienced strong labour productivity growth, significantly narrowing the long-standing productivity gap with other major economies.
Ten years on from the financial crisis, productivity remains persistently weak, in contrast with the remarkable performance of the labour market.
The UK productivity puzzle, and the productivity stagnation elsewhere, continues to be a topic of much debate and research and remains a key policy concern.

5. UK aggregate labour productivity

6. The magnitude of the UK productivity slowdown
The size of the productivity growth gap is around -2.5% for the UK market sector.
This is the difference between the average LP growth rate during the period , compared to the decade before the crisis.
This is higher to that in the US (-2.4%), Germany (-0.9%) and France (-0.8%).
The gap is higher if we take into account all years since the recession ( ); in the case of the UK this is -2.8%.

7. Our work
Sectoral analysis can provide clues to the origins of the productivity puzzle, distinguishing general macroeconomic patterns from sector trends and idyiosincrasies.
Explanations to the productivity stagnation have been evolving over time.
We analyse new industry-level data for the UK (for about 60 industries) for the period
We decompose the overall growth gap into the contributions attributed to the different parts of the economy.
And understand the role played by the different factors of production.
This is the most detailed industry productivity analysis available for the UK.

8. The productivity slowdown can be disaggregated into two components: a slowdown in productivity within individual sectors o “within effect”, and a “reallocation effect”.
The within effect captures the effect of the productivity growth in individual industries on the aggregate labour productivity growth (and is driven by capital intensity growth, labour quality growth, TFP growth).
The reallocation effect measures the impact on aggregate productivity of changes in the allocation of labour across sectors with different levels of productivity.
We use the decomposition of aggregate productivity growth proposed in Tang and Wang (2004).
𝑔 𝑡 = 𝑖 𝑄 𝑖𝑡−1 𝑄 𝑡−1 𝑔 𝑖𝑡 𝑤𝑖𝑡ℎ𝑖𝑛 𝑒𝑓𝑓𝑒𝑐𝑡 + 𝑖 (1+ 𝑔 𝑖𝑡 ) 𝜋 𝑖𝑡−1 𝜋 𝑡−1 ( 𝑠 𝑖𝑡 − 𝑠 𝑖𝑡−1 ) 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑒𝑓𝑓𝑒𝑐𝑡

9. High growth sections of the economy are no longer supporting aggregate productivity growth: Manufacturing, Finance and Other business services

10. Industry Section contributions to the annual labour productivity growth gap (percentage points), UK market sector,
Allocation across sections does not explain the LP growth puzzle. (Allocation across divisions doesn’t either, but also doesn’t offset the LP growth gap.) Factors that would change this conclusion: Real Estate

11. 2008-2010 compared to 1999-2007 2011-2015 compared to 1999-2007
Division contributions to the labour productivity growth gap, UK market sector.
Widespread weakness in labour productivity growth during the recession,
becoming more concentrated in particular divisions over time.
compared to
compared to

12. LP puzzle remains predominantly a TFP puzzle, albeit less so over time.
Capital shallowing arises from weak investment, from strong labour growth.
International comparison

13. Hours worked Output (volume index)
Widespread weakness in output growth during the recession, widespread strength in employment growth in more recent years ...
Hours worked
Output (volume index)
These are the cumulative frequency distribution of growth gaps UK market sector

14. … so that labour productivity growth remains weak in most divisions,
… so that labour productivity growth remains weak in most divisions, through a combination of weak TFP growth and relative capital shallowing.
Labour productivity
TFP
Capital
deepening

15. TFP and LP growth gaps and trade balances in goods

16. The LP growth puzzle is concentrated in sections of the economy where the UK has a marked comparative advantage …
Trade balances by service industries: UK 2011 and 2015.
Trade balances by agriculture and manufacturing industries: UK 2005, 2010 and 2015.

17. LP concentrated also in in some hard to measure sectors
Measuring GVA in key service sectors
Technological advance and quality improvements may not be reflected adequately in deflators for telecoms
Finance sector intermediate costs of risk are not fully captured in GVA measures (Bean Review, 2016)
Double Deflation
Calculations based on a simple methodology suggest that the slowdown in productivity growth in manufacturing may be less significant when we take into account differential input and output prices in calculating GVA. (Results sensitive to methodology.)
Other issues that affect industry results
Linking SIC07 over time; Balancing adjustments.

18. Alternative telecoms deflators suggest a different path for ICT output … world wide
Source: Abdirahman, Coyle, Heys and Stewart (Dec 2017), ESCoE DP 4

19. An attempt at double deflation in manufacturing

20. Concluding
Productivity weakness has been broader-based than in other European economies.
Every region, and more than 80 per cent of sectors experienced a productivity growth decline since the crisis.
But 60 per cent of the gap can be accounted for few industries, that account for less than 20 per cent of output.
The productivity gap is largely accounted by a TFP gap.
Capital shallowing has become more important as investment is not matching buoyancy of UK labour market.
Labour reallocation effects are relatively less important in explaining the UK productivity deterioration.
Measurement issues are key in understanding the magnitude of the productivity slowdown.
No region or sector can be singled out as under-performing.

21. Looking ahead…
An Industrial Strategy White paper (2017) that relies on five pillars: ideas, people, infrastructure, business environment, and places.
Policies focused on improving workforce skills (including training), accelerating digital adoption, and promoting investment and exports to shore up economic resilience.

22. Many thanks and comments welcome!