United Kingdom: Selected Issues

This Selected Issues paper examines the evolution of labor productivity, defined as output per worker, in the United Kingdom over the past two decades. It highlights a significant widening of the productivity gap with the United States, particularly after the Global Financial Crisis (GFC). The paper uses sectoral and firm-level data to explore various microeconomic drivers behind this divergence. A major factor is the loss of pre-GFC growth engines, especially the leverage-driven boom in the financial sector. However, this is not the sole explanation; outside the financial sector, UK publicly listed companies, particularly frontier firms, have also lagged behind their US counterparts due to a substantial decline in total factor productivity (TFP) growth post-GFC. This decline is attributed to reduced investment in intangible capital and lower R&D spending compared to the US. To address these issues, the paper recommends a two-pronged strategy: revitalizing traditional growth engines, particularly in the financial and Information and Communication Technology sectors, and fostering a more supportive environment for business innovation through increased access to scale-up finance and efforts to retain high-skilled individuals.