Piecing together the productivity puzzles
Richard Disney, Wenchao Jin, Helen Miller
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Output following each recession
108
Quarter 0 = 100
104
100
96
92
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Quarters since the last pre-recession quarter
2008Q1 output
1979Q4 output
Source: figure 3.2 in chapter 3
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1990Q2 output
Output and employment following each recession
108
Quarter 0 = 100
104
100
96
92
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Quarters since the last pre-recession quarter
2008Q1 employment
1979Q4 employment
1990Q2 employment
2008Q1 output
1979Q4 output
1990Q2 output
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Source: figure 3.2 in chapter 3
20
Output per worker following each recession
115
Real output per worker
(quarter 0 = 100)
110
105
2008Q1
100
3.2%
95
90
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20
Quarters since the last pre-recession quarter
Source: figure 3.2 in chapter 3
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Output per worker following each recession
115
1979Q4
Real output per worker
(quarter 0 = 100)
110
105
1990Q2
100
2008Q1
95
90
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20
Quarters since the last pre-recession quarter
Source: figure 3.2 in chapter 3
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Output per worker following each recession
115
1979Q4
Real output per worker
(quarter 0 = 100)
110
1990Q2
105
2008Q1
12.3%
100
linear trend
(1990Q2 to
2008Q1)
95
90
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20
Quarters since the last pre-recession quarter
Source: figure 3.2 in chapter 3
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Labour market
• Average real wages fell by 0.7% from 2008Q1 to 2012Q3, after
growing at 2.2% per year on average in the preceding decade
– consumer wage has fallen by more
• This is also in sharp contrast to the early 80s and 90s recessions
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Low real wages
Real hourly wage (first year of
recession = 100)
120
115
110
1979
1990
2008
105
100
95
0
1
2
3
4
5
Years since the year in which the recession began
Source: figure 3.7 in chapter 3
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6
Labour market – low real wages
• Low productivity  low wage
– firms may choose to or have to restrain wage growth
• Low wage low productivity
– low wages allow firms to retain more staff than they otherwise would
have, when demand falls
– low wages increase the attractiveness of labour as a form of input
relative to capital
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Labour market
• Some economic factors affect wages directly, and have effects on
productivity only through changes to wages
1. labour supply increased relative to previous recessions
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Inactivity rates stayed low by historical standards
Share of working-age population
27%
26%
25%
24%
23%
22%
21%
0
1
2
3
4
5
6
7
8
9
10
11
13
14
15
16
17
Quarters since the last pre-recession quarter
1979Q4
1990Q2
2008Q1
Source: figure 3.9 in the IFS Green Budget 2013
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12
18
19
20
Labour market
• Some economic factors affect wages directly, and have effects on
productivity only through changes to wages
1) labour supply increased relative to previous recessions, due to
– negative wealth shock  work longer to make up for lost wealth
– pensions reform
– more stringent welfare polices
2) flexible labour market -> cut wages and hours rather than headcount
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Capital markets
• Business Investment fell to 16% below pre-recession peak, which
was big in comparison to previous recessions
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Sharp fall in investment
105
1979
1990
2008
Pre-recession peak = 100
100
95
90
85
80
75
0
1
2
3
4
5 6 7 8 9 10 11 12 13 14 15 16 17
Quarters since pre-recession peak
Source: figure 3.11 in the IFS Green Budget 2013, “Gross fixed
capital formation”
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Capital markets
• Business Investment fell to 16% below pre-recession peak, which
was big in comparison to previous recessions
– gradually reduced the capital stock available to workers
– lower quality of capital
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Capital markets
• Misallocation of capital
– demand has fallen differentially for different goods and services, and
it takes time for capital to move from what are now low-productivity
projects to higher-productivity projects
• Consistent with the observation of
– higher dispersion of rates of return across sectors
– widening distribution of firms’ productivity
– lower exit rate than previous recessions, due to low interest rate and
bank forbearance
– low entry of new firms
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Other popular explanations
• Workforce composition
– more part-time and self-employment
– but also more educated, older, and have longer job tenures on
average
• Industrial composition
– the aggregate fall in productivity has resulted entirely from falls in
productivity within industries
– productivity changes within finance and mining and quarrying could
explain more than half of the aggregate fall in output per hour from
2008Q1 to 2012Q3
– but the productivity growth also slowed down significantly within
most other industries
• Labour hoarding or under-utilization
– but flows into employment remained high
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Public sector
• Measured public sector productivity growth has been near zero in
the decade till 2009
– measuring public sector output (value added) is difficult
– output is calculated from inputs to various degrees across the public
sector  little productivity growth
• We believe public sector productivity has increased since the
recession
– total “public sector” employment fell 6% since 2009Q4
– while output (value added) in “government services” increased
– puzzling because input-based output measures make it hard for
measured productivity to grow
• We may be making efficiency savings, but quality and longer-term
effects of public services are important as well
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Summary
• Output per worker has fallen since the recession and is 12% below
the historical trend
• This experience is very different to previous recessions
• We think the most important factors in explaining the
productivity shortfall are:
– low real wages
– low investment
– a mis-allocation of capital
• Other potential explanations found to be not crucial: labour
hoarding and changes to composition of the economy and of the
workforce
• Public sector productivity probably increased, but hard to judge
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