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

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Author Info
Charlotta Groth
Soledad Nuñez
Sylaja Srinivasan

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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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Handle: RePEc:boe:boeewp:295

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  1. Nicholas Oulton, . "ICT and productivity growth in the United Kingdom," Bank of England working papers 140, Bank of England. [Downloadable!]
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  2. Shapiro, Matthew D, 1986. "The Dynamic Demand for Capital and Labor," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 513-42, August. [Downloadable!] (restricted)
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  3. Charlotta Groth, . "Estimating UK capital adjustment costs," Bank of England working papers 258, Bank of England. [Downloadable!]
  4. Matthew D. Shapiro, 1987. "Capital Utilization and Capital Accumulation: Theory and Evidence," NBER Working Papers 1900, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
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  6. David Card & Richard B. Freeman, 2002. "What Have Two Decades of British Economic Reform Delivered?," NBER Working Papers 8801, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Susanto Basu & Miles S. Kimball, 1997. "Cyclical Productivity with Unobserved Input Variation," NBER Working Papers 5915, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1995. "Capital Utilization and Returns to Scale," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 67-124 National Bureau of Economic Research, Inc. [Downloadable!]
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  9. Sbordone, Argia M, 1997. "Interpreting the Procyclical Productivity of Manufacturing Sectors: External Effects or Labor Hoarding?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 26-45, February.
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  10. Basu, Susanto, 1996. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 719-51, August. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Richard Dion & Robert Fay, 2008. "Understanding Productivity: A Review of Recent Technical Research," Discussion Papers 08-3, Bank of Canada. [Downloadable!]
  2. Stephen D. Oliner & Daniel E. Sichel. & Kevin J. Stiroh, 2007. "Explaining a productive decade," Finance and Economics Discussion Series 2007-63, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  3. Hashmat Khan & John Tsoukalas, 2005. "Technology Shocks and UK Business Cycles," Macroeconomics 0512006, EconWPA. [Downloadable!]
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