Accounting for the slowdown in UK innovation and productivity
This paper conducts a comprehensive sources-of-growth analysis for the UK non-farm market sector, 2000 to 2019, using the latest ONS data including: new estimates of intangible investment; double deflated value-added; and updated price indices. All estimates are constructed bottom-up from data for 40 industries. The decomposition incorporates contributions from intangible capital, including both assets currently capitalised and uncapitalised in national accounts. We use these data to comment on the contribution of innovation to UK growth and account for the productivity slowdown. The data show that the slowdown in UK labour productivity growth can largely be attributed to a slowdown in innovation, where innovation is defined as the contributions of intangible capital deepening and TFP growth. Our main findings are that: a) the level of labour productivity in 2019 is 27 log points (31 percentage points) less than it would have been had it continued to grow at its 2000-07 rate; b) reallocation of labour made no contribution to the slowdown, rather the slowdown is within industries; c) capitalisation of the full range of intangible capital explains 5% of the slowdown due to the adjustment to growth in value-added; d) 35% is explained by a slowdown in the contribution of capital deepening (of which 25% tangible and 10% intangible) and 78% is explained by a slowdown in TFP growth; e) the slowdowns in labour productivity and TFP growth are largest in the more intangible-, knowledge-, technology- and digital-intensive industries; and f) less than one-tenth of the UK TFP slowdown can be explained by exceptionally fast UK TFP growth in the pre-crisis period.