We survey UK productivity performance over the long run across countries and focus on the sharp slowdown since the global financial crisis. There has been a predominant role for total factor productivity (TFP) when accounting for productivity performance, but capital shallowing may also be critical, even more so if capital accumulation is endogenous to current and prospective trends in productivity. Two macroeconomic trends deepen this puzzle, there has been a decline in real interest rates over the past 30 years and an increase in labour supply after 2008. And yet the ratio of (nominal) private and public investments to GDP has fallen over time. The fall in real rates has been accompanied by an increase in the preponderance of consumption-led expansions. The so-called secular stagnation was thus not the result of demand deficiency but a failure to address long-term structural supply-side issues. We examine the demographic debate and ask whether an ageing population may be less inclined to innovate, preferring to guard assets, but also whether it may adopt AI and other forms of automation that enhance labour productivity. We note that labour participation amongst older workers is the predominant factor in explaining the growth in total hours worked. The question then is why firms did not increase the ratio of capital services to labour employed.
We consider four explanations:
This is part of a series of working papers outlining the key issues and questions of The Productivity Institute’s key research themes. This paper covers the Macroeconomic trends & policy theme. Other papers provide an overview of Human capital, Organisational capital, Institutions & governance, Knowledge Capital, Geography and place, Social, environmental and technological transitions and Measurements & methods.
Authors Jagjit S. Chadha, Issam Samiri