John Lewis
How poor has the past decade of productivity growth been by historical standards? Exceptionally.
To investigate this I take Total Factor Productivity data from the Bank’s Millennium of Macroeconomic Data dataset and add on my estimate of 2017 growth (0.14%)
From 2007, 10-year average productivity growth was negative for the first time in almost a century. Overall, it was the worst decade since the late 18th century.
I then compare productivity performance after previous “big dips” in TFP growth: Defined here as two consecutive years of negative TFP growth over which the total fall was at least 2%. I identify 10 previous episodes since 1760.
For the first few years, the post-2007 dip (red) looks roughly average. The relative weakness only really emerges after about 3-4 years.
A decade after the big dips in the 19th century (green), productivity on average recovered to a level 3% higher than before; and in the 20th century (mauve) to about 12% higher.
10-year productivity growth averaged 0.7% in the 19th century and 1.4% in the 20th. So after 20th century productivity dips, the economy recovered (on average) almost all the “lost ground” relative to the century average, and about half the ground in the 19th. By 2017 however, productivity had barely grown from its post-crisis trough.
Productivity growth was worse after the 18th century episodes (blue), but in that century average productivity growth was around zero.
Whatever the cause, productivity growth over the past decade has been remarkably poor by most historical standards.
John Lewis works in the Bank’s Research Hub.
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It’s an interesting analysis, albeit one which has (rightly) been highlighted many times in journals and even broadcast media. I would like to see some analysis to dig into caused. There is presumably data from at least the 20th century’s dips to run some correlations (cum hoc ergo propter hoc notwithstanding)?
Interesting, but is growth everything? The standard of living is the UK is much much higher, how much more do we want? Growth = profit = use of planetary resources, which are finite. When will humans be satisfied? Probably never, promoting an attitude of gratitude rather than fear and greed may be a start….
Dear John, fascinating (and depressing) post, thanks to you and the team for putting the data together and the excellent graphics. Looking at the upper graph, there does seem to be a hint that we really need to understand better the 1970s slowdown since that’s when the rot seems to have set in. On the lower graph, which line is the post-1973 shock (1973 and 1943 look the same colour to me)? That does seem an interesting case when the initial downturn seems much sharper. And I’m not sure that I set much store by the 1940s capital stock data: if possible might be interesting to see the plot without that line. Again, many thanks, Jonathan Haskel
Could the unusual slow-down after 2011be part of the multiplier effects of the severe austerity policy and reductions in expenditure?
Dear John,
Can we expect a working paper on this? TFP (the Solow residual) has been subject to devastating critiques (Shaikh 1974, 1980; Felipe & McCombie 2001). These provide empirical evidence that the Cobb-Douglas production function, with its reliance on the untenable assumptions of constant returns to scale and perfect competition, is little more than an accounting identity. Given this, could we not learn more by examining the historical trend in labour productivity which would allow us to try to separate out embodied and disembodied technical change?
Best wishes,
Dr. Jeff Powell
University of Greenwich
Thinking about labour productivity, it is interesting how much of our stronger performance in the decade prior to the crisis was driven by TFP (the uptick in chart 1 before the crisis hit).
Over that period the contribution from labour composition was fairly solid, but the contribution from capital deepening was in decline (using the ONS decomposition, but I’m pretty sure you find the same in EUKLEMS).
I occasionally come back to the question – are our current problems just the hangover from a slowdown in capital deepening, which the TFP growth spurt during the 97-07 just masked?
Dan
An excellent and thought provoking bitesize blog. Ever since reading the rise and fall of american growth I’ve wondered what the analysis would look like for the UK. I suspect the story is similar. Look how productivity rebounds after a war (succeeding 1918 and 1943 decade) just as Gordon found in the american analysis. Is it fair to compare 07-2017 with a period that saw three industrial revolutions? As Robert Gordon notes, IR3 was mostly complete by 2004. The modern office with flat screens and Internet had arrived. Low tfp is a challenge for all developed countries and the pattern is similar in the US (albeit not quite negative). It’s the gap between us and our competitors that is a worry. Perhaps smart phones – remember the iphone only arrived in 2007 – and IOT will ensure the next decade makes up for the last. And then there are the more low tech solutions. Diffusion of existing technology and management practices.
If you look at relative productivity growth, (which compares the UK to other first world countries) we led the pack with the US for a generation before the 08-09 crisis. The first graph really illustrates the so called ‘Age of Affluence’ after WWII. In 50s-60s productivity growth peaking, but in relative terms we had the slowest productivity growth of the first world during this period.
Even after this appalling decade, UK productivity remains the same or higher than other G7 nations like Canada and Japan.
Historical context must be combined with international context if we are to see the whole picture. When UK’s productivity was growing at its fastest in history, we were actually enduring our most protracted period of relative economic decline. OK, the UK was doing well, but the rest of the world was doing even better.