Abstract
The level of private sector labour productivity has been particularly weak since the start of the crisis. In this paper we explore whether impairment to capital reallocation has been contributing to this weakness. The recent increase in the dispersion of output, prices and rates of return across firms and sectors is stark, and suggests that resources have had incentives to move. Efficient allocation requires that capital moves to firms and sectors where rates of return are relatively high. And the change in capital levels across sectors has been particularly low, suggesting there has been an unusually slow process of capital reallocation since 2008 compared to previous UK recessions and other banking crises. This result is also apparent within sectors. We use a simple and general model to show that increased price dispersion can be a consequence of frictions to efficient capital allocation. And the size of this dispersion can usefully inform us about the size of the associated output and productivity loss. We then find that – using firm level data – the relationship between rates of return and subsequent capital movements has changed since the financial crisis. Overall, our results suggest that impaired capital reallocation across the UK economy is likely to have been one factor contributing to the recent weakness in productivity growth.
Highlights
At the end of 2013, private sector output per worker remained around 18 percentage points below the level implied by a simple extrapolation of its pre-crisis trend.1 The scale of the productivity fall and the continued stagnation has been the defining feature of the UK’s recent recession and stands in contrast to previous UK recessions
We find that the positive relationship between rates of return and subsequent capital growth at the firm level has broken down since this financial crisis
We show how the degree of price dispersion can be mapped into a reduction in labour productivity
Summary
At the end of 2013, private sector output per worker remained around 18 percentage points below the level implied by a simple extrapolation of its pre-crisis trend. The scale of the productivity fall and the continued stagnation has been the defining feature of the UK’s recent recession and stands in contrast to previous UK recessions. A growing body of research has put forward various explanations for this weakness Some of these stress the cyclical or temporary nature of the slowdown while others highlight the structural or the more persistent nature of the productivity weakness. Those in the former camp rely on the fact that firms face adjustment costs when hiring or firing and may choose to hold on to labour in order to retain their skills and experience for when the economy recovers. If firms divert resources to activities dedicated to winning work and securing contracts, this may lead to temporary weakness Those in the latter camp stress the importance of shocks that had a persistent effect on the UK’s productive capacity such as negative shocks to the availability of credit to UK companies, for
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