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Factor utilisation and productivity estimates for the United Kingdom

  • Jens Larsen
  • Katharine Neiss
  • Fergal Shortall

In this paper series are derived for capital utilisation, labour effort and total factor productivity (TFP) from a general equilibrium model with variable factor utilisation and labour adjustment costs. Impulse responses from the model show that firms initially respond to unanticipated shocks by altering factor utilisation rates. In subsequent periods, firms adjust observable inputs such as physical capital and employment. As a result, utilisation rates are a leading indicator of firms hiring of both capital and labour. The estimate of capital utilisation is found to track survey-based measures quite closely, while movements in total hours worked drive the labour effort series. The estimate of TFP growth is found to be less cyclical than the rate of growth of a traditional Solow residual. Nevertheless, a weighted average of capital utilisation and labour effort - aggregate factor utilisation - is not closely related to the detrended Solow residual. This suggests that measures that conflate capacity utilisation and temporary deviations in TFP from its steady-state growth rate may be misleading indicators of excess demand pressure. Rather, the measure of aggregate factor utilisation is correlated with detrended labour productivity, providing more evidence that differences in average and marginal labour productivity may be linked to factor hoarding. Labour productivity, when calculated as output per unit of effective labour input, is less cyclical than a simple measure of output per hour.

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Paper provided by Bank of England in its series Bank of England working papers with number 162.

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Date of creation: Aug 2002
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Handle: RePEc:boe:boeewp:162
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  1. Susanto Basu & Miles S. Kimball, 1997. "Cyclical Productivity with Unobserved Input Variation," NBER Working Papers 5915, National Bureau of Economic Research, Inc.
  2. Cook, David, 1999. "Real Propagation of Monetary Shocks: Dynamic Complementarities and Capital Utilization," Macroeconomic Dynamics, Cambridge University Press, vol. 3(03), pages 368-383, September.
  3. Katharine S Neiss & Evi Pappa, 2002. "A monetary model of factor utilisation," Bank of England working papers 154, Bank of England.
  4. Susanto Basu & John Fernald, 2000. "Why is productivity procyclical? Why do we care?," Working Paper Series WP-00-11, Federal Reserve Bank of Chicago.
  5. Berndt, Ernst R. & Fuss, Melvyn A., 1986. "Productivity measurement with adjustments for variations in capacity utilization and other forms of temporary equilibrium," Journal of Econometrics, Elsevier, vol. 33(1-2), pages 7-29.
  6. Mark Bils & Jang-Ok Cho, 1993. "Cyclical factor utilization," Discussion Paper / Institute for Empirical Macroeconomics 79, Federal Reserve Bank of Minneapolis.
  7. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  8. Chang, Yongsung & Kwark, Noh-Sun, 2001. "Decomposition of hours based on extensive and intensive margins of labor," Economics Letters, Elsevier, vol. 72(3), pages 361-367, September.
  9. Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 297-346.
  10. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1990. "Labor Hoarding and the Business Cycle," NBER Working Papers 3556, National Bureau of Economic Research, Inc.
  11. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  12. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  13. Francis Green, 2001. "It's Been A Hard Day's Night: The Concentration and Intensification of Work in Late Twentieth-Century Britain," British Journal of Industrial Relations, London School of Economics, vol. 39(1), pages 53-80, 03.
  14. Roberts John M., 2005. "How Well Does the New Keynesian Sticky-Price Model Fit the Data?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-39, September.
  15. James H. Stock & Mark W. Watson, 1999. "Forecasting Inflation," NBER Working Papers 7023, National Bureau of Economic Research, Inc.
  16. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  17. Muellbauer, John, 1986. "The Assessment: Productivity and Competitiveness in British Manufacturing," Oxford Review of Economic Policy, Oxford University Press, vol. 2(3), pages i-xxv, Autumn.
  18. Ravn, Morten O, 1997. "Permanent and Transitory Shocks, and the UK Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(1), pages 27-48, Jan.-Feb..
  19. Matthew D. Shapiro, 1989. "Assessing the Federal Reserve's Measures of Capacity and Utilization," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 181-242.
  20. repec:cup:macdyn:v:3:y:1999:i:3:p:368-83 is not listed on IDEAS
  21. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 23-27.
  22. Burnside, Craig & Eichenbaum, Martin, 1996. "Factor-Hoarding and the Propagation of Business-Cycle Shocks," American Economic Review, American Economic Association, vol. 86(5), pages 1154-74, December.
  23. Erik Britton & Jens D J Larsen & Ian Small, 2000. "Imperfect competition and the dynamics of mark-ups," Bank of England working papers 110, Bank of England.
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