The UK Productivity and Jobs Puzzle: Does the Answer Lie in Wage Flexibility?

20 Pages Posted: 23 May 2014

See all articles by João Paulo Pessoa

João Paulo Pessoa

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

John Van Reenen

London School of Economics - Centre for Economic Performance (CEP); Stanford Graduate School of Business; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)

Date Written: May 2014

Abstract

UK GDP per worker fell by almost 4% in the five years following Lehman's collapse in 2008, something unprecedented in post‐war history. A possible reason for poor productivity is low growth in the effective capital–labour ratio. This is likely to have occurred because there has been a fall in real wages and increases in the cost of capital due to the financial crisis. We simulate various changes in the capital–labour ratio and after accounting for these changes, the evolution of total factor productivity appears much more similar to earlier severe recessions and likely to be related to underutilised resources.

Suggested Citation

Pessoa, João Paulo and Van Reenen, John Michael, The UK Productivity and Jobs Puzzle: Does the Answer Lie in Wage Flexibility? (May 2014). The Economic Journal, Vol. 124, Issue 576, pp. 433-452, 2014. Available at SSRN: https://ssrn.com/abstract=2441399 or http://dx.doi.org/10.1111/ecoj.12146

João Paulo Pessoa (Contact Author)

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

John Michael Van Reenen

London School of Economics - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6976 (Phone)
+44 20 7955 6848 (Fax)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom
+44 20 7240 6740 (Phone)
+44 20 7240 6136 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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