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The Financial Foundations of the Productivity Puzzle

Published online by Cambridge University Press:  01 January 2020

Jagjit S. Chadha ,
Amit Kara  and
Paul Labonne
Paul Labonne*
Affiliation:
National Institute of Economic and Social Research
*
[email protected];
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Abstract

The financial crisis has led to a change in the mix of capital and labour employed in the UK and a sharp decline in total factor productivity. This has meant that labour productivity has not recovered to any great degree since the financial crisis. We explore the role of overall and sectoral productivity in explaining the fall in labour productivity, but also question the extent to which productivity in the service sector may be measured with error. We outline the links between a constrained financial sector and a fall in overall productivity – in which intangible capital seems to play an important role – and illustrate how a financial sector providing intermediate services may act to amplify the business cycle impetus from a total factor productivity shock within the context of a calibrated model.

Keywords

productivity slowdownlabour productivityfinancial frictionsproductivity measurementE01E32E44
Type
Research Articles
Information
National Institute Economic Review , Volume 241 , August 2017 , pp. R48 - R57
Copyright
Copyright © 2017 National Institute of Economic and Social Research

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Footnotes

We thank colleagues for advice and comments, in particular Rhys Williams, Rebecca Riley, Nick Oulton, Young-Kwan Kang, Peter Dolton, Ron Smith and Bill Allen. Some of these results were shared at the NIESR Economists' Round Table in June 2017.

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