The UK Productivity Puzzle 2008-2013: Evidence From British Businesses

Publication type: NIESR Discussion Paper | Publication date: 31 May 2015 | Theme: Structural Economics & Productivity | NIESR Author(s): Riley, R; Rosazza Bondibene, C | External Author(s): Young, G | JEL Classification: L11, O47, E32 | NIESR Discussion Paper Number: 450

In many larger advanced economies labour productivity growth slowed sharply and remained subdued for years after the credit crisis of 2007/08. Nowhere was this more obvious than in the UK. We examine the dynamics of productivity among British businesses that lie behind this stagnation. The most striking feature is the widespread weakness in total factor productivity within firms, pointing to the importance of a common factor in explaining productivity weakness. In addition, we find that the positive correlation between surviving firms' employment growth and their relative productivity ranking broke down after 2007/08, as would be expected if an adverse credit supply shock had caused inefficiencies in resource allocation across firms. Indeed, during the immediate recession years 2008/09, this shift was most apparent in sectors with many small and bank dependent businesses. But subsequently, while the contribution of external reallocation to aggregate productivity growth in 2010/13 was smaller than in previous years, this was not obviously associated with sectoral bank dependence. We illustrate the sensitivity of these findings to the choice of decomposition method.

Keyword tags: 
productivity growth, productivity decomposition, resource allocation, credit shock, Great Recession, Great Stagnation