Is UK productivity growth low? A historical and cross-country perspective

Sophie Piton and Fabrizio Cadamagnani

A lot has been written about UK productivity and how weak it’s been in recent years. This post assesses UK productivity trends in a historical and cross-country perspective. Productivity growth has been weak across G7 economies over the past two decades, reflecting the end of the information and communications technology (ICT) revolution and the flattening gains from globalisation. The slowdown was particularly large in the UK, mainly because it experienced a larger decline in the share of manufacturing than peers and then because of the impact of Brexit. In recent years, US productivity growth has been accelerating thanks to tech, offering some optimism for the future of UK productivity.

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Canaries in the column? AI exposure and the UK’s hiring slowdown

Haley Schlicht

From Silicon Valley executives promising to automate white-collar work to headlines claiming AI is foreclosing the graduate entry market, the strained ‘low fire, low hire’ environment has increasingly been ascribed to technological transformation. UK vacancies nearly halved since their 2022 peak – a contraction so sustained it has reshaped the British hiring market for the better part of three years. This post examines how evidence of AI-driven transformation at the hiring margin is proving considerably more tenuous than the headlines suggest.

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Is artificial intelligence making us more productive? What the UK industry data show

Sandra Batten

Unlike previous waves of automation, machine learning and generative AI (Gen AI) technologies can perform non-routine cognitive tasks, such as those involving written or spoken language, and have the potential to affect a wider range of occupations. By augmenting or replacing workers in these tasks, these technologies promise to deliver significant productivity gains. AI adoption, while still limited, seems to be linked to productivity gains across industries in the US, although it can only explain a small fraction of the aggregate pick up in US productivity. This post examines the emerging evidence from UK industry data and finds some indication that AI is contributing to productivity growth following a similar pattern to previous key technologies.

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UK productivity puzzle – a production network perspective

Marko Melolinna

Input/output networks are important in propagating shocks in an economy. For understanding the aggregate effects of shocks, it is useful to know which sectors are central (ie, providing a lot of inputs to a lot of other sectors) and how the central sectors are affected by and propagate the shocks to other sectors. In a new Staff Working Paper, my co-author and I build a structural model incorporating key features of the sectoral production input/output network in the UK, and then use the model to help us understand UK productivity dynamics since the global financial crisis (GFC). We find that the slower productivity growth rates since the GFC are mainly due to negative shocks originating from the manufacturing sector.

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Shifting the composition of start-up cohorts can boost macroeconomic performance

Ralph de Haas, Vincent Sterk and Neeltje van Horen

Anaemic productivity growth and limited business dynamism remain key policy concerns in Europe and the US. Policies to improve macroeconomic performance often target existing firms. Examples include tax measures to stimulate firm-level Research & Development and structural reforms to eliminate distortions in labour, financial, and product markets. In a new paper we investigate an entirely different policy lever, one that has so far remained largely unexplored: influencing the types of firms that are being started in the first place. Using a comprehensive new data set on European start-ups, we show how tax policies that shift the composition of new start-up cohorts could deliver meaningful macroeconomic gains.

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Remote working, bargaining power and productivity

Lena Anayi

Remote working soared during the Covid-19 (Covid) pandemic. Over half of British workers worked from home during the initial Covid lockdowns (first panel in Chart 1). And by February this year, nearly a third of workers were still doing so at least some of the time. But will this last? In this blog post, I explore firms’ and workers’ attitudes to remote working, the extent to which these may differ, and factors that might affect negotiations between them on future remote working arrangements.

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Covid-19 briefing: working from home and worker productivity

John Lewis, Andrea Šiško and Misa Tanaka

The Covid pandemic has led to a large enforced shift towards working from home (WFH) as a result of ‘stay-at-home’ policies in many countries. This led to a resurgence in interest in, and new reignited discussion about, the consequences of greater WFH. In this briefing we review the literature on the impact of WFH on productivity. Across a very diverse literature the key lessons are: impacts depend on the nature of tasks, the share of WFH matters, and there is big difference between enforced versus voluntary WFH. And the caveats are important too: cost savings at the firm level don’t automatically translate into economy-wide productivity gains and evidence on long-run effects remains very scarce.

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UK productivity growth from 2008 to 2018: weakness was structural, not cyclical

Marko Melolinna

Monetary policy makers need to know whether the economy is operating above or below its supply capacity. If the economy is operating above its supply capacity, inflation is likely to rise, and vice versa. A crucial component of supply capacity is the labour productivity trend but we cannot observe this directly. We have to estimate it. Thankfully, there are ways of splitting observed macroeconomic time series into estimated trend and cyclical components. Using a variety of methods on UK data, I find that UK productivity growth over the period 1991 to 2018 has been structurally, rather than cyclically, weak since the financial crisis. And, UK trend productivity has been strongly correlated with trend productivity in other advanced economies.

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How important are large firms for aggregate productivity growth in the UK?

Marko Melolinna

Aggregate labour productivity growth has been low in the UK following the global financial crisis in 2008 (Chart 1). The average annual growth rate has been only 0.7% over the period 2008 to 2019, which is around a third of the growth rate seen during the decade preceding the crisis. There are many ways of analysing the reasons for this weakness, but in this blog post, I concentrate on examining the role that the largest firms in the UK have played in the story. Our analysis covering the past three decades from 1990 to 2017 suggests that firm-specific, or idiosyncratic, shocks to the 100 largest firms had a significant effect on aggregate productivity dynamics in the UK.

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How do firms grow as they age?

Marko Melolinna and Patrick Schneider.

Firm age is a main determinant of firm growth and survival. For example, older firms are likely to be larger and grow more slowly than younger ones (see Audretsch & Mata, 1995; Coad et al, 2013). They are also more likely to survive (see Audretsch & Mahmood, 1995, Manjón-Antolín & Arauzo-Carod, 2008). This is why, in this blog post, we look at how firms’ lifecycles – firms being born, aging and dying – are linked to how firms grow. The results show that, as they age, firms in the United Kingdom grow mainly by employing more people, rather than by generating more turnover per employee. And while firms are on average less likely to die the older they get, the cohort of firms that were born since the financial crisis are more resilient than older firms.

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