FS is a part of it but only around a quarter of the net decline, relative to trend. Another popular explanation is the reduction in capital intensity, but that explains even less. Interesting analysis by the BoE shows that most of the fall in productivity is the effect of intra-firm reductions in TFP. But, essentially, we have no idea why it’s happened and all of the plausible mechanisms account for only a small portion of the fall. So we have an idea of what is happening but not why, which makes macro forecasting exceptionally difficult in the UK at the moment!

Of course, the UK’s 1973 recession also yielded flat productivity for a decade afterwards before normal service resumed and that’s never been adequately explained. I have no idea if it’s analogous because obviously the inflation problem made it a very different recession, but it suggests that we have a long-standing gap in our understanding of productivity. Which won’t be news to any economists, I don’t think!

The charts in here are quite interesting: http://www.ons.gov.uk/ons/dcp171766_358477.pdf.
Interesting the allocation effect was only slightly negative, and then turned very positive. Interesting that the decline in financial services doesn’t show up until 2009, even though Lehman UK ceased to exist in Q3 2008. Sadly I don’t have time to dig deeper into it.

I suspect there is something to that story. It is certainly interesting that the period of UK outperformance was in the 1990s – before the surge in migration to the UK – rather than in the period since 2000. Indeed, the whole post WW2 revival of Britain (per capita income, producitivity) was probably helped by very weak population growth, limiting pressures on non-tradables and the real exchange rate.

Although, remember that the overvaluation over the medium term requires some form of imperfection in capital flows – sure that could hold for NZ, but for the UK that is more implausible.

That’s part of the question – is it just a drop in TFP due to a shock in the financial sector, or even just a sector specific drop in productivity? My impression was that this was the initial blame taker, but as time has gone on the evidence has moved against this – certainly not my area of expertise, so it would be interesting to hear

Interesting Q is whether the Reddell Hypothesis offers any lessons for UK. Maybe it does. When cable was at 2.07 i-bank economists were saying this is crazy, way above fair value, but it didn’t feel like a bad thing because the City was booming and papering over the cracks. But meanwhile you had very high low-skill immigration, emigration of native born, deindustrialisation and very low investment, and CAD roughly in balance. (The Town and Country Planning Act 1947, which limited housing supply, was also an important driver in this process). And generally higher interest rates in UK than EZ or US in the years leading up to GFC. So, somewhat different fact set but also many features in common.

Is the UK experience that much of a puzzle though? I would have thought it was exactly what one might have expected given the impact of the GFC on bank profitability and given the very substantial fall in oil output. The ONS even did a study announcing that contraction of these two industries alone explain most of the fall in productivity. (What is perhaps notable is that the BOE did a better job than the ECB of getting people back into other jobs, even if they were less “productive”). That’s one “framework” for you. And it seems to me that recent governments in NZ have drawn the “lesson” that jobs in finance & resources pay very well.

I’m sure it is a marketing exercise. But I’d say that thinking about frameworks regarding what causes changes in productivity is a useful exercise for looking into a countries productivity performance – surely that is what the conclusion was implying?

It felt a bit like a marketing exercise for the Productivity Commission. The article concludes:
Yet, the UK’s recent productivity performance raises more questions than answers. This is why insights from New Zealand can be valuable. This country’s recent experience provides important clues on how to solve the UK’s productivity puzzle.
And yet, since NZ’s productivity performance has show no signs of sustainably improving, and the NZPC appears as yet to have no overall model for thinking about how that failure could be rectified (as distinct from various small, often no doubt useful, things at the margin), it is not clear what insights the recent NZ experience offers in thinking about the UK. Again, taking the slightly longer view, and whether looking at labour productivity or TFP, one might reasonably think any flow of lessons should run in the opposite direction.

Productivity is one measure that is an outcome from a number of processes, and in itself is one factor that is related to something we genuinely care about – welfare (and related to the other factors that influence this as well). Having a lot of groups framing the issue in different ways and investigating issues is useful – not just for “finding a cause”, but for trying to figure out why it may matter, what the failure may be, and who the winners and losers involved are.

Like I’ve said in the past, there may well be plus sides to the factors holding down our productivity – it may be a product of how egalitarian NZ is (even though society here has a weird vision that we are not egalitarian), it may be a product of the inclusive growth that has given us very high employment rates. Who knows! But when framed that way, it starts to sound like a policy trade-off we need to consider, instead of a knot we can untie for free goodies 😉