Working paper by Professor Diane Coyle and Dr Jen-Chung Mei identifies the primary sectors contributing to the UK's productivity slowdown despite them generally being considered strengths of the UK market. So, is how to construct deflators for the modern economy the issue?
We explore the slowdown in UK productivity from 2008 by decomposing the changes in labour productivity into contributions from different sectors of the economy. Reallocation of labour between sectors makes little contribution. The main contributions to the aggregate slowdown come from within manufacturing and information and communication, as well as agriculture and finance.
Disaggregating further, the main contributions are attributable to transport equipment (mainly motor vehicles) and pharmaceuticals in manufacturing, and computer software and telecommunications in information and communication. Strikingly, these are among the sectors generally considered to be strengths of the UK economy. Comparing the UK with three other advanced economies (US, France and Japan), transport equipment and pharmaceuticals are also among the main contributors to their productivity slowdowns, although there are variations among the four countries.
We suggest that part of the ‘puzzle’ of the slowdown in labour productivity in the UK and elsewhere in ‘real’ or volume terms is linked 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. Another contributor may be the character of production supply chains and technologies in some specific sectors. Our decomposition results point to some significant questions for the research agenda.