Tackling the UK's productivity puzzles
Team Leaders: Ralf Martin, Anna Valero, and John Van Reenen
The UK is a particularly stark example of global productivity problems with labour productivity in early 2020 over a fifth below its pre-financial crisis trends. Unsurprisingly, real wages followed productivity and remained below their levels in 2007 in 2020.
UK Labour Productivity would have been 30% higher on pre-Financial Crisis trends
Deaton Review (Jan de Loecker, Tim Obermeier, John Van Reenen)
To map what has happened in the UK compared to other countries, we are writing a chapter for the Deaton Inequality Review at IFS, gathering the most comprehensive data on the UK business landscape over the last three decades. Broadly, what we can see is a massive rise in inequality between firms in terms of their size, productivity and profitability. One policy aspect of this is how to modernize anti-trust policy in a "winner take all" world.
Declining Dynamism? (Richard Davies)
Has dynamism stalled in the UK, as it seems to have done in the US? In the US, the fraction of employees working in young firms has fallen since the 1980s, the entrepreneurship rate is down, there is less job creation and destruction and firms are slower to respond to shocks. Is this true in the UK, and if so, why?
Are ideas harder to find? (John Van Reenen, Jonathan Haskel)
Is it becoming harder to build on the shoulders of giants? This is a kind of falling diffusion that could be because of greater fixed costs of intangible capital, more aggressive use of IP by leading firms or just that it takes ever longer to push forward the knowledge frontier, as we know more and more.
Our influential work showed that the latter seems to be true, but was silent on the exact causes of this and how to combat it.
See also "Are ideas becoming harder to find?" (with Nick Bloom, Chad Jones and Michael Webb), American Economic Review 110(4): 1104-1144.
Several projects are trying to look at this including improved measurement of intangible capital in general (e.g. Jonathan Haskel's Spintech project) and patenting in particular (PatentCity)
Market Power and Innovation in the Intangible Economy (Maarten de Ridder)
The slowdown of productivity growth, the decline of business dynamism, and the rise of market power are three trends that have attracted a lot of attention in academic and policy debates. This project points to the rising use of intangible inputs as a unified explanation for these trends. Intangibles reduce marginal costs and raise fixed costs, which gives firms with high-intangible adoption a competitive advantage, in turn deterring other firms from entering. Firms with high intangible adoption disrupt sectors and initially boost productivity, but negatively affect the entry of new firms and therefore suppress the effect of R&D on innovation and growth in the long run. See working paper.
Intangible Investment and the Persistent Effects of Recessions (Maarten de Ridder)
This project empirically identifies a mechanism through which large recessions, such as financial crises, exert persistently negative effects on output. Endogenous growth theory suggests that a shortfall in intangible investments temporarily slows technological progress, creating a gap between pre-crisis trend and actual GDP. Exploiting variation in firm-level exposure to the Global Financial Crisis, this project show that tight credit conditions reduce intangible investments even for large corporations, and significantly slowed down revenue growth between 2010 and 2015. When jointly estimating the response of revenue and patents to intangible investments, capital investments and changes in employment during the crisis, we find that only intangible investments have a persistently negative effect. See working paper.
The future of trade after Brexit (Tom Sampson, Swati Dhingra)
Much of our work has been building a framework to understand the economic impact of Brexit. We will continue developing our models in order to analyze the impact of the new trading arrangements.