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The UK Productivity and Jobs Puzzle: Does the Answer Lie in Labour Market Flexibility?

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  • Joao Paulo Pessoa
  • John Van Reenen

Abstract

GDP per worker fell for the five years after 2008 which is unprecedented in post war UK history. In this paper we argue that "capital shallowing" (i.e. the fall in the capital-labour ratio) could be the main reason for this. This is likely to have occurred due to changes in factor prices: a large fall in real wages and increases in the cost of capital. In previous recessions real wages did not fall, but reforms to union strength and welfare have made wages more sensitive to negative demand shocks. This wage flexibility is desirable as it reduces the risks of long-term unemployment building up. After accounting for changes in capital TFP is more similar to earlier recessions and likely to be related to under-utilised resources and misallocation. The fall in labour productivity is therefore likely to reverse if demand improves - e.g. through stronger monetary or fiscal policy stimulus.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Special Papers with number 31.

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Date of creation: Jun 2013
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Handle: RePEc:cep:cepsps:31

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEPSP

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Keywords: productivity; employment; wages; labour market flexibility;

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  1. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen Terry, 2013. "Really Uncertain Business Cycles," CEP Discussion Papers, Centre for Economic Performance, LSE dp1195, Centre for Economic Performance, LSE.
  2. Chang-Tai Hsieh & Peter J Klenow, 2008. "Misallocation and Manufacturing TFP in China and India," 2008 Meeting Papers 121, Society for Economic Dynamics.
  3. Eric J. Bartelsman & John C. Haltiwanger & Stefano Scarpetta, 2009. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," NBER Working Papers 15490, National Bureau of Economic Research, Inc.
  4. Peter Goodridge & Jonathan Haskel & Gavin Wallis, 2013. "Can Intangible Investment Explain the UK Productivity Puzzle?," National Institute Economic Review, National Institute of Economic and Social Research, National Institute of Economic and Social Research, vol. 224(1), pages R48-R58, May.
  5. Crafts, Nicholas, 2012. "British relative economic decline revisited: The role of competition," Explorations in Economic History, Elsevier, Elsevier, vol. 49(1), pages 17-29.
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Cited by:
  1. Nicholas Oulton, 2013. "Medium and Long Run Prospects for UK Growth in the Aftermath of the Financial Crisis," CEP Occasional Papers, Centre for Economic Performance, LSE 37, Centre for Economic Performance, LSE.

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