This document summarizes recent trends in UK productivity and economic growth. It discusses two periods of productivity growth: the 1980s under Thatcher and more recently with ICT adoption. However, UK productivity has fallen since the 2008 financial crisis while employment has held up, possibly due to labour hoarding. The document reviews literature examining causes of productivity shifts, finding sectors like financial services boosted growth. Ongoing measurement challenges and the outsized public sector downturn complicate understanding recent productivity.

1. EC-111 British Economy
Recent UK Macroeconomic
Trends
Dr Catherine Robinson
F26, Richard Price Building
Office Hours: Mondays 10.30-11.30 and Thursdays 9.30-10.30
Appointments: c.robinson@swansea.ac.uk

2. Productivity
 Considering trends in economic growth and productivity
 Helps put the UK into context
 Structured around 3 papers
 Muellbauer‟s 1991 paper on competition and productivity
 O‟Mahony and Robinson (2007)
 Disney, Jin and Miller (2013), „The Productivity
Puzzles‟, IFS Green Book, Chapter 3
ALL AVAILABLE ON BLACKBOARD

3. The Basics:
Economic Growth
 Growth in GDP
 But this stems from
 Increasing labour
 Increasing capital
 Improving the way these two are combined through technology
 PRODUCTIVITY Growth
 Krugman‟s 1991 quote:
 “productivity isn‟t everything, but in the long run, its almost
everything”
 Producing more output from inputs (technology or better
organisation)
 Sectoral perspective

4. Early Work of Muellbauer
 Focussed on productivity and competitiveness in
manufacturing
 “Manufacturing is the bell-wether for the
economy”(Muellbauer, 1991, p.99)
 International competitiveness, 1966-1990
 relative input prices, relative export prices and relative unit
labour costs (figure 1)
 In all cases, we see a rise in costs/prices over
time, especially from 1978 onwards
 Noticeably worse in the late 1980s than in the late 1970s
 Substantial labour shedding in 1991 expected to stabilise ULC
measure

5. Productivity growth in UK
manufacturing (1980s-1990s)
 Manufacturing experiences faster productivity growth
than other parts of the economy
 Easier to measure?
 Noticeable speeding up of labour productivity in the
1980s
 In part yes, a speeding up, but also followed on from a very
slow 1970s period
 Muellbauer looks at the slow-down and the upturn

6. Labour productivity index (1995=100)
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
_1970
_1971
_1972
_1973
_1974
_1975
_1976
_1977
_1978
_1979
_1980
_1981
_1982
_1983
_1984
_1985
_1986
_1987
_1988
_1989
_1990
_1991
_1992
_1993
_1994
_1995
_1996
_1997
_1998
_1999
_2000
_2001
_2002
_2003
_2004
_2005
_2006
_2007
TOTAL MANUFACTURINGD
EUKLEMS, 2009
releaseGross value added per hour worked
Muellbauer, 199
1
O‟Mahony and
Robinson, 200
7

7. Causes for the 1970s
slowdown
 Raw material prices
 Oil crises
 Exacerbated by inappropriate capital
 Suitable for low energy prices
 Became inefficient with the change in prices
 Global recession
 Led to scrapping of plant, machinery, buildings
 ALTERNATIVE VIEWS
 Bruno and Sachs (1982) – all down to measurement
 Labour markets and industrial relations
 Adjustment costs because of the input price shocks

8. Causes for the 1980s upturn
(Muellbauer)
 Capital productivity and unobserved scrapping of the earlier period
reverses
 UK manufacturing firms were too optimistic and hoarded labour
 Great labour shake-out followed with the Thatcher administration
 Industrial relations
 Over valued exchange rate, high interest rates, withdrawal of
subsidies and state-financed rescues and the SCALE of recession
put managers under pressure to cut costs and improve work
practices
 Improvement in the quality of workers
 New technology
 Catch-up hypothesis (Crafts, 1991)

9. Muellbauer in conclusion….
 Not just a manufacturing phenomenon but data outside
manufacturing are ropey
 Links it back to macro policy
 Weakening of union power did help to increase productivity
growth in unionised plants more than non-unionised plants
(Metcalf 1989)
 Long run education and training of workers crucial to
productivity growth and competitiveness
 UK housing market hindered labour mobility
 Warnings about interest rates as sole policy response
 Too much faith put in the Thatcher Miracle
 Tax cuts and other improvement in incentives and institutions to
revolutionise the UK economy

10. Productivity and growth from an
international perspective, 1970-2004
 Data from EUKLEMS
 UK compared with France, Germany and US
 Takes a more whole-economy approach
 Splits the period in two
 1970-1995
 1995-2004
 Notes that recent performance shows RLP growth faster than
comparable countries
 BUT a relatively lower starting base (Table 2)
 Still a significant productivity gap

13. In part, education?

14. Sectoral sources of growth
 Need to take into account the
sector size as well as the
productivity growth
 UK sees a collapse in
productivity growth in
traditional manufacturing
sectors (not shown)
 But in market
services, outperforms France
and Germany
 This is due to financial and
business services (rather than
retail/wholesale – in which
Germany does well)

15. US outperforms Europe
 First mover advantage with technology
 Different sectoral mix
 US has natural advantages
 A more entrepreneurial spirit
 US has greater organisational capital
 Institutional differences
 Europe has more labour and product market regulation

16. The Current Productivity
Puzzle
 Until this last quarters figures, there were more people
in employment now than before the recession
 BUT Output per worker fell by 3.2% between 2008(Q1)
and 2012(Q3)
 Why?
 ....previous recessions saw smaller drops because
employment fell faster than output

17. Disney et al (2013) provide some
explanations
 Measurement issues (again)
 Industrial composition…productivity falls in some sectors more
than others
 Changes in workforce composition
 Fall in real wages
 Level and allocation of capital
 Impact of recession has fallen disproportionately on the public
sector (6% decline since 2009)
 While output has increased – productivity gain
 BUT all sorts of problems measuring productivity in the public
sector

18. Or to put it another way….
 The Economist…

19. Summary
 Two periods of productivity growth in the UK economy
 The Thatcher Miracle
 Concentrated in the manufacturing sector
 The ICT adoption
 Splits along ICT using and producing lines, not traditional
sectoral breakdowns
 UK, like the rest of Europe, seems to lag the US
 Some cause for optimism in UK performance stemming from
the business and financial services sector
 BUT – 2007 saw the credit crunch and the start of the
financial crisis
 Productivity has fallen and employment held up
 Labour hoarding/capacity utilisation
 Public sector productivity improvements?

20. References
ONS podcasts – great one on Balance of Payments, and also some on
unemployment etc. Tend to be short term, but informative
nonetheless, especially with current data. http://www.ons.gov.uk/
Muellbauer, J. (1991) ‘Productivity and Competitiveness’, Oxford
Review of Economic Policy, 7(3), 99-117
O’Mahony, M, and C. Robinson (2007) ‘UK Growth and Productivity
in an International Perspective: Evidence from
EUKLEMS’, National Institute Economic Review, 200, 79-85
Disney, R. W. Jin and H. Miller (2013) ‘The Productivity
Puzzles, Chapter 3, IFS Green Budget’, available at
http://www.ifs.org.uk/publications/6560