Productivity weakness has become one of the most striking characteristics of the UK''s recent economic performance. Output per hour worked, which grew by around 0.5% per quarter on average in the decade prior to 2008, has been broadly flat over the last decade, with implications for earnings, household income and macroeconomic management. These developments compound the longstanding underperformance of UK productivity compared with that in similarly advanced economies.
At the Royal Economic Society''s annual conference in March 2018, a special session to celebrate the 80th anniversary of the National Institute of Economic and Social Research (NIESR), speakers considered potential explanations for the productivity slowdown and productivity performance differentials across countries and firms.
NIESR has long championed the study of aggregate, sectoral, firm-level and regional productivity, as well as international comparisons of secular trends in productivity performance, publishing its first work on this topic in 1948 by Rostas on The Comparative Productivity in British and American Industry. The session acted as a focal point for the Institute''s applied work.
In his study, Nicholas Crafts (Warwick) considers whether the European Union is to blame for Britain''s persistent productivity failure. He argues that it is not. But it is important to understand why not. In the context of a review of the UK''s post-war productivity performance, he argues that there have been continuing (albeit changing) shortcomings in supply-side policy and institutions and that these have been home-grown. EU membership has, if anything, had a small positive impact. It follows that Brexit is not the solution to the UK''s productivity problem: ''supply-side policy problems are serious but home-grown. Brexit does not help to solve them. A hard Brexit, which ends state aid controls, may open the door to a return to the 1970s.''
In his study, Eric Bartelsman (Vrije Universiteit Amsterdam and Tinbergen Institute) examines ''Lessons from Cross-Country Firm-Level Analysis'' and outlines the development of new databases and research initiatives to create comparable cross-country firm-level datasets and analysis, which have led to important insights into the nature of value creation. He finds that factor reallocation towards more productive firms varies across countries. Variation in reallocation is related to structural differences in firm size distribution across countries, as well as to variation in labour and product market institutions. He argues that: ''Productivity-enhancing reallocation varies countercyclically but, similar to findings for the United States, it did not pick up in the Great Recession. The sharp drop in exports and tightness in credit markets may provide an explanation for this lack of a silver lining from the Recession.''
In his study, Philip Wales (Head of Productivity, Office for National Statistics) explores ''The Anatomy of Labour Productivity in the UK: Lessons from New and Existing Data Sources''. He presents new results of ONS'' work to understand better recent UK productivity performance, using new surveys and information from a range of new datasets. He highlights large differences in the productivity of firms in relatively tightly defined industries, and pinpoints some notable changes in the distribution of labour productivity across firms since 2008. The work incorporates hitherto unavailable information about the foreign direct investment links of specific firms, and detailed information about the trading status and intensity of different companies to explain the distribution of labour productivity. Finally, it mobilises the findings of a new survey of management practices among private sector businesses to examine how they are linked to productivity outcomes.
In her study, Rebecca Riley (NIESR, ESCoE) looks ''Below the Aggregate: A Detailed Account of the UK Productivity Puzzle'' and assesses which sectors of the economy conform to or drive aggregate patterns in productivity and competitiveness. Many high growth industries 1998-2007 are no longer supporting aggregate productivity growth, in particular financial services, telecommunications and some manufacturing industries. She argues that the low productivity puzzle remains to a large extent a ''total factor productivity'' puzzle and is concentrated in sectors where the UK appears to have a comparative advantage. She suggests that: ''The sectoral patterns of productivity growth provide clues to the causes of the UK productivity growth slowdown. A lack of external demand may be part of the reason for low productivity growth.''
In his summary, Jagjit Chadha (NIESR and Centre for Macroeconomics) argues that the UK economy faces a number of critical problems that are summarised by the current productivity puzzle and many are hardly that new. The mix of capital to labour is too low to allow sufficiently high growth in real wages. He argues that ''The interaction of subdued demand and the banking system in a period of retrenchment and reform may be creating hard constraints on credit availability that limit the firm-level dynamism.''
Further reading
Bartelsman, E, P. Lopez-Garcia and G. Presidente (2018). ''Cyclical and Structural Variation in Resource Reallocation: Evidence for Europe'', Tinbergen Institute Mimeo.
Chadha, J. S. (2017) ''The Productivity Puzzle'', Lecture on 21st September 2017 at Gresham College.
Crafts, N. (2018) ''Britain''s Persistent Productivity Failure: is the EU Really to Blame?'', University of Warwick mimeo.
National Institute Economic Review, Productivity: special issue http://journals.sagepub.com/page/ner/special-issues/productivity
Rostas, L (1948) The Comparative Productivity in British and American Industry, Cambridge University Press, National Institute of Economic and Social Research.
Riley, R, A. Rincon-Aznar and L. Samek (2018). ''Below the Aggregate: A Detailed Account of the UK Productivity Puzzle'', NIESR and ESCoE mimeo.
