Productivity Growth, Adjustment Costs and Variable Factor Utilisation: The UK Case

Abstract

This paper constructs estimates of total factor productivity (TFP) growth for the United Kingdom for the period 1970-2000, using an industry data set that spans the whole economy. The estimates are obtained by controlling for variable utilisation of capital and labour, and costs of adjusting these factors. The analysis is focused on the 1990s. This was a period when the growth rate of the standard measure of TFP growth for the United Kingdom, the Solow residual, did not match the sharp rise in US productivity, even though the macroeconomic environment in both countries was similar. The paper delivers two main results. First, the aggregate Solow residual underestimates TFP growth throughout the 1990s, since it does not account for falling utilisation rates and high capital adjustment costs. Second, the impact of non-technological factors on the Solow residual is similar in the first and the second half of the 1990s. This means that the broad movement in the Solow residual during the 1990s is similar to that of the estimated TFP growth. Potential reasons behind these results are discussed using disaggregated data.