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

  • Charlotta Groth
  • Soledad Nuñez
  • Sylaja Srinivasan

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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File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2006/WP295.pdf
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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. Matthew D. Shapiro, 1985. "Capital Utilization and Capital Accumulation: Theory and Evidence," Cowles Foundation Discussion Papers 736, Cowles Foundation for Research in Economics, Yale University.
  2. Nicholas Oulton, 2002. "ICT and Productivity Growth in the United Kingdom," Oxford Review of Economic Policy, Oxford University Press, vol. 18(3), pages 363-379.
  3. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1995. "Capital utilization and returns to scale," Working Paper Series, Macroeconomic Issues 95-5, Federal Reserve Bank of Chicago.
  4. repec:cup:cbooks:9780521453455 is not listed on IDEAS
  5. 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.
  6. Basu, Susanto, 1996. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 719-51, August.
  7. Matthew D. Shapiro, 1986. "The Dynamic Demand for Capital and Labor," NBER Working Papers 1899, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  10. Charlotta Groth, 2005. "Estimating UK capital adjustment costs," Bank of England working papers 258, Bank of England.
  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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