Britain’s Labour Productivity Slowdown Since 2008: Evidence, Explanations and Policy Implications

Britain’s recovery from the 2008 financial crisis was characterised by strong employment growth and unusually weak growth in labour productivity. This paper examines the empirical evidence and assesses the main explanations proposed in the literature, focusing primarily on the period up to 2019. This allows the analysis to distinguish the prolonged effects of the financial crisis from the additional economic disruptions associated with the COVID-19 pandemic, the UK’s departure from the European Union and the subsequent energy-price shock. Labour hoarding may explain part of the initial decline in labour productivity, but is less convincing as an explanation for its very slow growth during the recovery. Firm-level evidence also suggests that most of the slowdown occurred within existing firms, rather than through weaker reallocation of resources between them. The contraction in credit supply, higher external financing costs and unusually flexible real wages discouraged investment and encouraged firms to substitute labour for capital, contributing to weak capital deepening. Household wealth losses, changes in retirement incentives and welfare reforms may have further increased labour supply, alongside the effects of inward migration. The unequal recovery in household wealth may also have affected job matching and investment in human capital. The paper further examines how differences in management practices influence firms’ investment decisions, technological adoption and the efficiency with which productive resources are employed. Although more recent estimates attribute much of the accumulated labour productivity shortfall to weaker TFP growth, the economic factors restraining capital accumulation may also have limited improvements in TFP. The policy discussion considers the importance of access to finance, productive investment, wealth distribution and the wider adoption of effective management practices.