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Productivity growth, adjustment costs and variable factor utilisation: the UK case

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  • Charlotta Groth
  • Soledad Nuñez
  • Sylaja Srinivasan

Abstract

This paper constructs estimates of total factor productivity (TFP) growth for the United Kingdom for the period 1970-2000, using an industry data set that spans the whole economy. The estimates are obtained by controlling for variable utilisation of capital and labour, and costs of adjusting these factors. The analysis is focused on the 1990s. This was a period when the growth rate of the standard measure of TFP growth for the United Kingdom, the Solow residual, did not match the sharp rise in US productivity, even though the macroeconomic environment in both countries was similar. The paper delivers two main results. First, the aggregate Solow residual underestimates TFP growth throughout the 1990s, since it does not account for falling utilisation rates and high capital adjustment costs. Second, the impact of non-technological factors on the Solow residual is similar in the first and the second half of the 1990s. This means that the broad movement in the Solow residual during the 1990s is similar to that of the estimated TFP growth. Potential reasons behind these results are discussed using disaggregated data.

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Paper provided by Bank of England in its series Bank of England working papers with number 295.

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Date of creation: Apr 2006
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Handle: RePEc:boe:boeewp:295

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  1. Argia M. Sbordone, 1994. "Interpreting the procyclical productivity of manufacturing sectors: external effects or labor hoarding?," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago 94-9, Federal Reserve Bank of Chicago.
  2. Basu, Susanto, 1996. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(3), pages 719-51, August.
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  4. Nicholas Oulton, 2001. "ICT and productivity growth in the United Kingdom," Bank of England working papers, Bank of England 140, Bank of England.
  5. Burnside, C & Eichenbaum, M & Rebelo, S, 1995. "Capital Utilization and Returns to Scale," RCER Working Papers 402, University of Rochester - Center for Economic Research (RCER).
  6. Oulton,Nicholas & O'Mahony,Mary, 1994. "Productivity and Growth," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521453455.
  7. David Card & Richard B. Freeman, 2004. "What Have Two Decades of British Economic Reform Delivered?," NBER Chapters, in: Seeking a Premier Economy: The Economic Effects of British Economic Reforms, 1980-2000, pages 9-62 National Bureau of Economic Research, Inc.
  8. Charlotta Groth, 2005. "Estimating UK capital adjustment costs," Bank of England working papers, Bank of England 258, Bank of England.
  9. Matthew D. Shapiro, 1985. "Capital Utilization and Capital Accumulation: Theory and Evidence," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 736, Cowles Foundation for Research in Economics, Yale University.
  10. Matthew D. Shapiro, 1984. "The Dynamic Demand for Capital and Labor," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 735, Cowles Foundation for Research in Economics, Yale University.
  11. Susanto Basu & Miles S. Kimball, 1997. "Cyclical Productivity with Unobserved Input Variation," NBER Working Papers 5915, National Bureau of Economic Research, Inc.
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Cited by:
  1. Ludmila Fadejeva & Aleksejs Melihovs, 2009. "Measuring Total Factor Productivity and Variable Factor Utilisation: Sector Approach, The Case of Latvia," Working Papers, Latvijas Banka 2009/03, Latvijas Banka.
  2. Stephen D. Oliner & Daniel E. Sichel & Kevin J. Stiroh, 2007. "Explaining a Productive Decade," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 81-152.
  3. Richard Dion & Robert Fay, 2008. "Understanding Productivity: A Review of Recent Technical Research," Discussion Papers 08-3, Bank of Canada.
  4. Konstantins Benkovskis & Ludmila Fadejeva & Julia Wörz, 2013. "How Important Is Total Factor Productivity for Growth in Central, Eastern and Southeastern European Countries?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 8-27.
  5. Ball, V. Eldon & San Juan, Carlos & Ulloa, Camilo, 2012. "State Productivity Growth: Catching Up and the Business Cycle," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington, Agricultural and Applied Economics Association 123334, Agricultural and Applied Economics Association.
  6. Hashmat Khan & John Tsoukalas, 2005. "Technology Shocks and UK Business Cycles," Macroeconomics, EconWPA 0512006, EconWPA.
  7. Harchaoui, Tarek M., 2012. "The Europe-U.S. Retail Trade Productivity Gap in a Rear-view Mirror," GGDC Research Memorandum, Groningen Growth and Development Centre, University of Groningen GD-127, Groningen Growth and Development Centre, University of Groningen.
  8. Hashmat Khan & John Tsoukalas, 2011. "Effects of Productivity Shocks on Employment: UK Evidence (revised 25 February 2013)," Carleton Economic Papers 11-05, Carleton University, Department of Economics, revised 25 Feb 2013.
  9. V. Eldon Ball & Carlos San Juan Mesonada & Camilo A. Ulloa, 2011. "Agricultural productivity in the United States: catching-up and the business cycle," Economics Working Papers we1116, Universidad Carlos III, Departamento de Economía.

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