Macroeconomic Perspectives on Productivity

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:

• The first is the shortfall of funding available to new or growing SMEs.
• The second is whether there is an increasingly significant fraction of unprofitable firms with a low stock market valuation who do not invest, so-called zombies.
• Third, a low-interest rates environment may inadvertently favour more industry concentration and rations credit to entrepreneurs by magnifying the impact of rents or worsening the unequal access to financing among firms.
• Fourth, we consider the role of burgeoning public debt in holding back growth with the threat of future taxes and whether there has been a misallocation of public expenditure that has prevented the provision of public goods, which may enhance growth prospects. These points may be acting to bring about an interaction of aggregate supply and demand in a low-growth trap.

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