This paper tries to calculate some facts for the "knowledge economy". Building on the work of Corrado, Hulten and Sichel (CHS, 2005,9), using new data sets and a new micro survey, we (1) document UK intangible investment and (2) see how it contributes to economic growth. Regarding investment in knowledge/intangibles, we find (a) this is now greater than tangible investment at, in 2008, £141bn and £104bn respectively; (b) that R&D is about 11% of total intangible investment, software 15%, design 17%, and training and organizational capital 22%; (d) the most intangible-intensive industry is manufacturing (intangible investment is 20% of value added) and (e) treating intangible expenditure as investment raises market sector value added growth in the 1990s due to the ICT investment boom, but slightly reduces it in the 2000s. Regarding the contribution to growth, for 2000-08, (a) intangible capital deepening accounts for 23% of labour productivity growth, against computer hardware (12%) and TFP (40%); (b) adding intangibles to growth accounting lowers TFP growth by about 15% (c) capitalising R&D adds 0.03% to input growth and reduces ΔlnTFP by 0.03% and (d) manufacturing accounts for just over 40% of intangible capital deepening plus TFP.

This paper investigates whether intangibles might explain the UK productivity puzzle. We note that since the recession: (a) firms have upskilled faster than before; (b) intangible investment in R&D and software has risen whereas tangible investment has fallen; and (c) intangible and telecoms equipment investment slowed in advance of the recession. We have therefore tested to see if: (a) what looks like labour hoarding is actually firms keeping workers who are employed in creating intangible assets; (b) the current slowdown in TFP growth is due to the spillover effects of the past slowdown in R&D and telecoms equipment investment. Our main findings are: (a) measured market sector real value added growth since the start of 2008 is understated by 1.6% due to the omission of intangibles; (b) 0.75pppa of the TFP growth slowdown can be accounted for by the slowdown in intangible and telecoms investment in the early 2000s. Taken together intangible investment can therefore account for around 5 percentage points of the 16% productivity puzzle. Keywords: Intangible investment, productivity JEL Classifications: O47, E22March 2013 ** Imperial College Business School and CEPR, IZA. E-mail:j.haskel@ic.ac.uk. * Imperial College Business School. E-mail p.goodridge10@ic.ac.uk. *** University College London and Bank of England. E-mail: g.wallis@ucl.ac.uk.We are very grateful for financial support for this research from NESTA, ESRC (Grant ES/I035781/1) and UK-IRC. We also thank three anonymous referees and an editor for useful comments and suggestions. This work contains statistical data from ONS which is Crown copyright and reproduced with the permission of the controller of HMSO and Queen's Printer for Scotland. The use of the ONS statistical data in this work does not imply the endorsement of the ONS in relation to the interpretation or analysis of the statistical data. This work uses research datasets which may not exactly reproduce National Statistics aggregates. The views expressed in this paper are those of the authors and do not necessarily reflect those of affiliated institutions. All errors are of course our own.2

This paper revisits the UK productivity puzzle using a new set of data on outputs and inputs and clarifying the role of output mismeasurement, input growth and industry effects. Our data indicates an implied labour productivity gap of 13 percentage points in 2011 relative to the productivity level on pre-recession trends. We find that: (a) the labour productivity puzzle is a TFP puzzle, since it is not explained by the contributions of labour or capital services (b) the re-allocation of labour between industries deepens rather than explains the productivity puzzle (i.e. there has been actually been a reallocation of hours away from low-productivity industries and toward high productivity industries (c) capitalisation of R&D does not explain the productivity puzzle (d) assuming increased scrapping rates since the recession, a 25% (50%) increase in depreciation rates post-2009 can potentially explain 15%(31%) of the productivity puzzle (e) industry data shows 35% of the TFP puzzle can be explained by weak TFP growth in the oil and gas and financial services sectors and (f) cyclical effects via factor utilisation could potentially explain 17% of the productivity puzzle. Continued weakness in finance would suggest a future lowering of TFP growth to around 0.8% pa from a baseline of 0.9% pa.

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