Ready for change: how and why to make the UK economy more dynamic

Britain’s productivity shortfall is its foundational economic problem. Debate about this gap and how to fix it typically focus on raising productivity of existing firms, via two routes. First, innovation: investment, R&D and patenting as ways to inject new ideas into pre-existing firms. Second, diffusion: the cascading of those new technologies and improved management practices as a way for less productive firms to catch up with the best. Both processes are important, but something else has been largely forgotten: the role of economic change. The contribution of this paper is to put dynamism, reallocation and change back into discussions about UK economic policy. We’re not just talking less about economic change, we’re doing less of it. The pace of labour reallocation has slowed, with firms growing and shrinking less in response to shocks than they used to: the rate at which jobs were reallocated from shrinking to growing firms fell by one-fifth after 2008. Zooming out, the pace at which the economy changes shape, shifting resources between sectors, has also slowed to a nine-decade low. The world may be changing fast, but our firms have been moving slowly. Sputtering economic change has an economic cost: lower productivity and wages. Realising a higher productivity future means more change rather than less. There are many things policy can do to ensure that markets are better equipped to enable capital and labour to move into more productive firms with good jobs. Policy must also recognise that greater dynamism will bring costs as well as benefits: some disruption for workers that move or lose their jobs, and for the sectors, firms and places that grow or shrink. Policy must not only boost dynamism, but also cushion its impact.