Long and Short-Term Effects of the Financial Crisis on Labour Productivity, Capital and Output

55 Pages Posted: 24 Jan 2013 Last revised: 4 Feb 2013

See all articles by Nicholas Oulton

Nicholas Oulton

London School of Economics - Centre for Macroeconomics(CFM)

Maria Sebastia-Barriel

Bank of England - Structural Economic Analysis Division

Date Written: January 24, 2013

Abstract

The behaviour of labour productivity in the United Kingdom since the onset of the recession in early 2008 constitutes a puzzle. Over four years after the recession began labour productivity is still below its previous peak level. This paper considers the hypothesis that economic capacity can be permanently damaged by financial crises. A model which allows a financial crisis to have both a short-run effect on the growth rate of labour productivity and a long-run effect on its level is estimated on a panel of 61 countries over 1955-2010. The main finding is that a banking crisis as defined by Reinhart and Rogoff on average reduces the short-run growth rate of labour productivity by between 0.6% and 0.7% per year and the long-run level by between 0.84% and 1.1% (depending on the method of estimation), for each year that the crisis lasts. A banking crisis also reduces the long-run level of capital per worker by an average of about 1%. The corresponding effect on GDP per capita is about double the effect on GDP per worker since there is a long-run, negative effect on the employment ratio.

Keywords: productivity, financial, banking crisis, recession

JEL Classification: E23, E32, J24, O47

Suggested Citation

Oulton, Nicholas and Sebastia-Barriel, Maria, Long and Short-Term Effects of the Financial Crisis on Labour Productivity, Capital and Output (January 24, 2013). Bank of England Working Paper No. 470, Available at SSRN: https://ssrn.com/abstract=2206347 or http://dx.doi.org/10.2139/ssrn.2206347

Nicholas Oulton

London School of Economics - Centre for Macroeconomics(CFM) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

HOME PAGE: http://https://ideas.repec.org/e/pou3.html

Maria Sebastia-Barriel (Contact Author)

Bank of England - Structural Economic Analysis Division

Threadneedle Street
London, EC2R 8AH
United Kingdom

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