Productivity Dynamics in the Great Stagnation: Evidence
from British Businesses
Rebecca Riley*, Chiara Rosazza Bondibene* and Garry Young**
*National Institute of Economic and Social Research & CFM
**Bank of England & CFM
9 April 2014
RES 2014 Annual Conference, Manchester
Disclaimers:
Any views expressed cannot be taken to represent those of the Bank of England or to state Bank of
England policy.
This work contains statistical data which is Crown Copyright; it has been made available by the Office for
National Statistics (ONS) through the Secure Data Service (SDS) and has been used by permission.
Neither the ONS nor SDS bear any responsibility for the analysis or interpretation of the data reported
here. This work uses research datasets which may not exactly reproduce National Statistics aggregates.
Acknowledgements:
The financial support of the Economic and Social Research Council grant reference ES/K00378X/1 is
gratefully acknowledged.
Disclaimers
• Any views expressed cannot be taken to represent those of the Bank of
England or to state Bank of England policy.
• This work contains statistical data which is Crown Copyright; it has been
made available by the Office for National Statistics (ONS) through the Secure
Data Service (SDS) and has been used by permission. Neither the ONS nor SDS
bear any responsibility for the analysis or interpretation of the data reported
here. This work uses research datasets which may not exactly reproduce
National Statistics aggregates.
Motivation
Stylised facts
• There was a measurable credit crunch in the UK in 2007/8 with credit
supply reduced by 20%
• UK labour productivity fell sharply during the recession of 2008-9 and
recovered only sluggishly after that
• In level terms productivity is currently around 15% below a simple
extrapolation of its pre-crisis trend
• In sharp contrast with the experience of other post-war recessions in the
UK when the fall was less steep and the recovery was quicker
Motivation
A possible channel why financial crises lead to permanent losses of output is
the reduction of resource allocation across businesses, which hinders one of
the key mechanism through which productivity growth arises
We investigate to what extent the weakness in productivity in the aftermath
of the global financial crisis of 2007/2008 may be due to:
• a reduction in the allocation of resources between high and low
productivity firms which might occur through:
 resource misallocation between existing firms
 a lack of creative destruction
• a widespread productivity shock occurring within firms
Possible explanations
Reasons why the impacts of a banking crisis on economic performance are
exacerbated by impaired resource allocation in the economy:
• The cleansing effects of recession (Caballero and Hammour, 1994) may be
depressed when capital markets are imperfect and firms face credit
constraints
 Caballero and Hammour (2005)
 Berlevy (2003)
• Bank forbearance leads to the existence of zombie companies as troubled
banks seek to avoid crystallising losses on their balance sheets
 Peek and Rosengreen (2005)
 Caballero, Hoshi and Kashyap (2008)
Related literature
Other studies analyse the pattern of productivity dynamics in the wake
of the financial crisis:
• Japan during the 1990s
 Griffin and Odaki (2009)
• US manufacturing firms during the Great Recession
 Foster Grim and Haltiwanger (2013)
Decomposition of aggregate productivity growth
We start by writing aggregate productivity at time t ( Π𝑡 ) as a share-weighted average
of the productivity of individual firms (𝜋𝑖𝑡 ):
Π𝑡 = 𝑖 𝑠𝑖𝑡 𝜋𝑖𝑡
where 𝑠𝑖𝑡 is a measure of firm i's market share at time t, 𝑠𝑖𝑡 ≥ 0 and 𝑖 𝑠𝑖𝑡 = 1
We then decompose the change in share weighted firm productivity between time t-k
and time t into 4 components:
∆Π𝑡 =
Within
𝑖∈𝐶 𝑠𝐶𝑖 ∆𝜋𝑖𝑡
+
+
−
𝑖∈𝐶 ∆𝑠𝐶𝑖𝑡 (𝜋𝑖 − Π𝐶 )
Between
Entry
𝑖∈𝑁 𝑠𝑖𝑡 𝜋𝑖𝑡 − Π𝐶𝑡
𝑖∈𝑋 𝑠𝑖,𝑡−𝑘 (𝜋𝑖,𝑡−𝑘 − Π𝐶,𝑡−𝑘 ) Exit
This decomposition is an hybrid between two other decompositions used in the
literature:


Different reference productivity for entrants, exitors and stayers as in Melitz and Polanec (2013)
Within effect calculated using a share-weighted mean and continuing firms’ market share
normalised on the total market share of continuers by revising the approach of Griliches and Regev
(1995)
Data: the Annual Respondents Database (ARD)
• Establishment level survey which covers businesses in the non-financial
non-farm market sectors
• Data available for 1997-2011 and for manufacturing back to 1974
• A census of larger businesses and a stratified random sample of
businesses with less than 250 employees
• It contains also basic information for all businesses in the sampling frame
(the IDBR, a list of all UK businesses registered for tax purposes) which
allows to:
 Determine business entry and exit
 Calculate grossing weights
• We focus on the longitudinal sample of firms with 10 or more employees
since it is insufficient to support representative analysis of micro firms:
 The probability of observing a micro business in two separate years (conditional on being
live) is only 1 in 10,000
• We aggregate the data up to the enterprise level, as banking relationships
are more likely to take place at this level of aggregation
• Financial information is published in current values
 GVA deflators available at 2- and 3-digit sector level are used to construct real values
TRENDS IN LABOUR PRODUCTIVITY, UK 2001-2012
120
115
110
105
100
95
90
85
80
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
ARD decomposition sample
ABI & ABS
Market sector
•Differences between the series expected because of differences in sector and size coverage and
in cleaning and weighting procedures
• All these series exhibit broadly the same pattern over time, with labour productivity in 2011 a
little more than 10% below a simple linear extrapolation of the trend 2001-2007
BUSINESS EXIT AND ENTRY RATES
Share of enterprises
0.7
0.6
0.5
0.4
0.3
0.2
0.1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Exit by t+4 (Excl. micro firms)
Exit by t+4
Entry since t-4 (Excl. micro firms)
Entry since t-4
• At any point in time more than a third of live businesses will have entered the market over the last
four years and more than a third will die over the next four years
• Dip in annual entry rate of around 2% between 2009 and 2010 (not shown). This drop is more evident
in the 4 year entry rate which will reflect cumulated changes in annual entry rates
• Rise in 4 year exit rates after 2004, when surviving 4 years into the future meant surviving the crisis
LABOUR PRODUCTIVITY BY 4 YEAR SURVIVAL STATUS
GVA per head (£1000, 2008 prices)
45
40
35
30
25
2001
2002
2003
Continuer to t+4
2004
2005
Exit by t+4
2006
2007
2008
Continuer from t-4
2009
2010
2011
Entry since t-4
• It is the low productivity firms that exit. Firms that will die in the next 4 years are 17% less
productive that firms that will not die
• Labour productivity among entrants is low relative to incumbents (entrants are less capital
intensive and have the scope to grow) but the gap is smaller than for exit.
DECOMPOSITION OF 4-YEAR CHANGES IN LABOUR PRODUCTIVITY
Growth components
Within Between Entry
External
Growth
Exit
Net
entry
Total
Total
Employment shares
Sample sizes
Productivity growth (%)
2007-2011
OURS
FHK
GR
MP
-12.3
-4.6
-10.9
-16.4
7.2
0.3
6.6
11.3
-2.0
-2.0
-1.9
-2.0
4.6
3.8
3.6
4.6
2.6
1.8
1.8
2.6
9.8
2.1
8.4
13.9
-2.5
-2.5
-2.5
-2.5
OURS
FHK
GR
MP
4.9
11.6
3.7
5.4
6.6
-1.1
6.2
6.2
-1.4
0.3
-0.4
-1.4
3.8
3.0
4.4
3.8
2.4
3.4
4.0
2.4
9.0
2.3
10.2
8.5
13.9
13.9
13.9
13.9
OURS
FHK
GR
MP
4.2
9.1
3.1
0.8
0.7
-4.5
1.2
4.2
-0.9
0.0
-0.4
-0.9
2.7
2.1
2.9
2.7
1.9
2.1
2.5
1.9
2.6
-2.3
3.7
6.0
6.8
6.8
6.8
6.8
2003-2007 to 2007-2011
OURS
FHK
GR
MP
-17.2
-16.3
-14.6
-21.8
0.6
1.4
0.4
5.1
-0.6
-2.4
-1.4
-0.6
0.8
0.8
-0.8
0.8
0.3
-1.5
-2.2
0.3
0.8
-0.2
-1.8
5.4
-16.4
-16.4
-16.4
-16.4
2001-2005 to 2007-2011
OURS
FHK
GR
MP
-16.6
-13.8
-14.0
-17.2
6.5
4.8
5.4
7.1
-1.1
-2.0
-1.5
-1.1
1.9
1.7
0.8
1.9
0.8
-0.3
-0.7
0.8
7.3
4.5
4.7
7.9
-9.3
-9.3
-9.3
-9.3
2003-2007
2001-2005
Productivity growth change (%
points)
Entrants
Exits
Entrants
Exits
Entrants
Exits
0.107
0.164
Continuers
Entrants
Exits
4945
3159
4308
0.115
0.202
Continuers
Entrants
Exits
6953
4268
5704
0.110
0.219
Continuers
Entrants
Exits
7420
4259
6338
DECOMPOSITION OF 1-YEAR CHANGES IN LABOUR PRODUCTIVITY, MANUFACTURING,
2003-2010
6%
per annum
4%
2%
0%
2004
2005
2006
2007
2008
2009
-2%
-4%
External
Within
Total
•The slowdown in manufacturing productivity growth in 2008-2010 arises because of a slowdown
in productivity growth WITHIN firms
•The contribution from external restructuring over the same period is similar to the pre-crisis
years
DECOMPOSITION OF 1-YEAR CHANGES IN LABOUR PRODUCTIVITY, MANUFACTURING,
1985-1992
6%
per annum
4%
2%
0%
1986
1987
1988
1989
1990
1991
-2%
-4%
External
Within
Total
•During the 1980s and early 1990s it was also the WITHIN component that drove changes in
productivity growth over time but it fell back less than it did in the current recession
• This is why a stagnation in productivity growth was avoided (and not because the cleansing
effects of the recession were stronger)
EXTERNAL RESTRUCTURING AND PRODUCTIVITY GROWTH, MANUFACTURING,
1985-1992 and 2003-2010
2.0%
contribution per annum
1.6%
1.2%
0.8%
0.4%
0.0%
2004
2005
2006
2007
2008
2009
1986
1987
1988
1989
1990
1991
2000s
1980s/90s
•After the recession in 1990 the contribution of external restructuring was slightly higher than
before
•This is in contrast to the recession of 2008 after which the contribution from restructuring fell
back a bit
4.0%
2.0%
3.8%
1.8%
3.6%
1.6%
3.4%
1.4%
3.2%
1.2%
3.0%
1.0%
2004
2005
2006
2007
2008
2009
1986
1987
1988
1989
1990
1991
2000s
contribution per annum, 1980s/90s
contribution per annum, 2000s
EXTERNAL RESTRUCTURING AND PRODUCTIVITY GROWTH, MANUFACTURING SMEs,
1985-1992 and 2003-2010
1980s/90s
•The contribution of external restructuring fell back during the Great Stagnation to a level that was
lower than any point since 2004
•In contrast, after the recession in 1990 the contribution of external restructuring was higher than
before
• The offset to the productivity drop within firms that was provided by external restructuring have been
more muted during the current recession
SECTORAL BANK DEPENDENCE
Sector
Proportion of active non-financial businesses with a charge
outstanding
Manufacturing
0.48
Construction
0.39
Wholesale & Retail
0.39
Accommodation & Food
0.37
Transport & Storage
0.28
Arts & Entertainment
0.21
Administration & Support
0.21
Professional & Scientific
0.18
Information & Communication
0.13
•Using FAME we evaluate sectoral bank dependence by the proportion of businesses within a
sector that have an outstanding bank charge
•The table ranks sectors according to their bank dependence before the crisis
EXTERNAL RESTRUCTURING AND PRODUCTIVITY GROWTH, SERVICE SECTOR SMEs, 2002-2011
7%
contribution per annum
6%
5%
4%
3%
2%
1%
0%
2003
2004
2005
Bank dependent sectors
2006
2007
2008
Not bank dependent sectors
2009
2010
Other sectors
• On average 2004-2006 external restructuring contributed approximately 4 % points to annual
productivity growth
• Bank dependent sector group: the contribution of external restructuring fell sharply following
the financial crisis. The picture is very different for the least bank dependent group where the
contribution was 1% point higher in 2009-2011 than 2004-2006
Conclusions
• The major part of the decline in UK productivity growth following the
financial crisis is explained by a widespread productivity shock WITHIN firms
• While the crisis did hamper resource allocation to some extent, a
misallocation of resources across firms, caused by an adverse credit supply
shock, is unlikely to be the key factor behind the stagnation of UK productivity
• In contrast with the experience during the 80s and early 90s, the
productivity contributions of resource reallocation fell during the Great
Stagnation to a level that was lower than any point since 2002 among smaller
businesses in bank-dependent manufacturing sector
• In contrast with the experience in service sectors than do not rely on bank
finance, the productivity contributions of resource reallocation fell sharply
between 2007 and 2011 among smaller businesses in bank-dependent
service sectors
Thanks for your attention
r.riley@niesr.ac.uk
c.rosazza_bondibene@niesr.ac.uk