Diagnosing the UK Productivity Slowdown: Which Sectors Matter and Why?
This paper explores the slowdown in labour productivity growth in the UK and other advanced economies by decomposing its growth into contributions from different sectors of the economy, looking both at within-industry productivity growth and labour reallocation between sectors. We find that the within-industry contribution is the main source of the slowdown. Comparing trends pre- and post-2008, the aggregate productivity slowdown can largely be attributed to the manufacturing and the information and communication sectors. Disaggregating further, the UK productivity growth slowdown can be mainly attributed to transport equipment and pharmaceuticals within manufacturing, and computer software and telecommunications within information and communication. Strikingly, these are advanced, high value added sectors considered to be strengths of the UK economy. Looking across other advanced economies, our results confirm that manufacturing and information sectors are the main drivers of the labour productivity growth slowdown. Part of the explanation for the slowdown in in these sectors may relate to the underlying question of how to construct deflators for a modern economy when technological and structural changes are leading to large relative price shifts. The structure and supply chains of the key slowdown sectors also merit further investigation.
Note: This paper was updated in April 2022; it was originally published in March 2022.