Diagnosing the UK productivity slowdown: which sectors matter and why?

Abstract

This paper explores the slowdown in labour productivity growth in the UK and other advanced economies by decomposing its growth into contributions from different sectors of the economy, looking at both within‐industry productivity growth and labour reallocation between sectors. We find that the within‐industry contribution is the main source of the slowdown. Comparing trends pre‐ and post‐2008, the aggregate productivity slowdown can be attributed largely to the manufacturing sector and the information and communication (ICT) sector. Disaggregating further, the UK productivity growth slowdown can be attributed mainly to transport equipment and pharmaceuticals within manufacturing, and computer software and telecommunications within ICT. Strikingly, these are advanced, high value‐added sectors considered to be strengths of the UK economy. Looking across other advanced economies, our results confirm that manufacturing and ICT sectors are the main drivers of the slowdown, to differing degrees. Part of the explanation for the slowdown in in these sectors may relate to the underlying question of how to construct deflators for a modern economy when technological and structural changes are leading to large relative price shifts. The structure and supply chains of the key slowdown sectors also merit further investigation.

Accounting for the slowdown in UK innovation and productivity

“…Thus labour reallocation does not contribute to the slowdown as its contribution speeds up by 0.21% pa. Therefore, as in Coyle and Mei (2023), we find that the slowdown is within industries. Incorporating all CHS intangibles in output and capital, as in panel B of Table 4, does not alter the conclusion.…”

“…We find that reallocation of labour made no contribution to the slowdown. Rather, the slowdown is within industries, a finding also reported in Coyle and Mei (2023). Similarly, labour composition did not contribute to the slowdown; in fact, the contribution sped up.…”

“…In terms of industry contributions, we find that the slowdowns in labour productivity and TFP growth are largest in the more intangible‐, technology‐ and digital‐intensive industries, using a number of definitions, which we think is a new finding. Coyle and Mei (2023) similarly report a slowdown in advanced, high value‐added industries. In particular, we find large slowdowns in TFP growth in advanced (high‐tech/knowledge‐intensive) manufacturing and financial services.…”

“…A casual glance at these lists shows that the industries that contributed to the slowdown are perhaps surprising in many cases, a finding echoed in Coyle and Mei (2023). They include industries generally thought of as 'high-technology', 'knowledge-intensive', 'high-productivity' industries.…”

“…We show that slowdowns in labour productivity and TFP growth are largest in more intangible‐, knowledge‐, technology‐ and digital‐intensive industries using a number of definitions, which we think is a new finding. Coyle and Mei (2023) similarly report labour productivity slowdowns in unexpected industries, considered to be advanced, high value‐added sectors. In particular, we find that TFP slowdowns in finance especially, but also wholesale trade, IT and information services, manufacture of transport equipment (which includes aerospace), manufacture of machinery and equipment, pharmaceuticals, manufacture of ICT equipment, and publishing and broadcasting activities, all contribute to the aggregate TFP slowdown.…”