UK PRODUCTIVITY: The impact of lost jobs

Involuntary job separations (firings or redundancies) can explain more than a quarter of the UK''s productivity puzzle, according to research by Panagiotis Giannarakis, to be presented at the Royal Economic Society''s annual conference in Brighton in March 2016. His study suggests that even if displaced workers got new jobs, their productivity was considerably down on what it was in their previous employment.

In the first quarter of 2008, the UK entered one of the deepest recessions of its modern history. During the crisis, real GDP per capita and labour productivity (as output per hour worked) dropped by over 7% and the UK economy only started to recover following the trough of this crisis in 2009Q2.

After the trough, real GDP gradually returned to its pre-crisis trend. Surprisingly for the same period, labour productivity has experienced almost zero growth, following a 2.5% annual growth rate in the pre-crisis period. This is called the UK''s productivity puzzle and it has recently attracted the attention of many researchers who are trying to give a plausible explanation.

The findings of this study show that involuntary job separations (firings or redundancies) can explain more than a quarter of the UK''s productivity puzzle.

More specifically, the study looks at the possible role of involuntary job separations (or displacements) of high tenured workers on post-crisis productivity. Since in the UK during the crisis, the fraction of displaced employed workers, increased by 50% and their wages decreased by about 16% relatively to before the crisis, it becomes natural to ask to what extent these productivity losses for workers who experienced a displacement event, can explain the UK''s productivity puzzle.

The empirical results of this study show that displacements of high tenured workers can explain on average 27% of the post-crisis gap between actual productivity and potential productivity if it had followed the path of the pre-2008 trend. Furthermore, 78% of this effect can be explained by job separations of highly educated workers and 22% by separations of low educated workers.

One possible reason why displacements should matter for productivity is suggested by Jacobson et al. (1993) who argue that after a job separation, high tenured displaced workers lose some of their accumulated capital. These individual capital losses make workers less productive in their new jobs than if they had not been displaced. Intuitively, these capital and productivity losses should be important at an aggregate level, as well.

''Can Job Displacements explain the UK''s Productivity Puzzle?'' by Panagiotis Giannarakis. Panagiotis Giannarakis is at the University of Southampton.