The UK Productivity Puzzle

Question 1: Which of the following was the most important cause for the slowdown in UK productivity growth?

Question 2: Which of the following was the second most important cause for the slowdown in UK productivity growth?

In the last two questions you are asked which government policies are best suited to help the UK emerge from its productivity growth slowdown. Question 3 asks for your most preferred policy option, while question 4 asks for your second choice. You may use the comment section to outline specific policy recommendations.

Question 3: Which of the following policies would best help improve private sector productivity?

Question 4: Which of the following policies would be your second choice of policy to boost private sector productivity, in addition to or absent your first choice?

The UK Productivity Puzzle: CFM Survey 

Summary 

The UK has seen slow rates of productivity growth over the past decade, with output per hour and real wages no higher today than they were prior to the global financial crisis. Nearly half of leading economists surveyed by the Centre for Macroeconomics point to low demand due to the financial crisis, austerity policies and Brexit as a major cause for this productivity slowdown. Despite this diagnosis, only a small minority of the panel believes that the solution lies in demand-side policy. Instead, a majority of panellists support promoting productivity growth through investments in education and worker training. Other policies such as infrastructure investments, and tax and regulatory policies are also proposed.  

Background 

The February 2020 survey by the Centre for Macroeconomics (CFM) asked its panel of top UK economists about the causes of and possible policy responses to slow growth in UK productivity. Respondents were first asked for the (two) main causes for low productivity growth. They were then asked to give their (two) preferred policy options. 

The productivity puzzle

Growth of output per worker has declined dramatically since the global financial crisis of 2008-09. Output per hour and real wages are now no higher than they were prior to the financial crisis (cf  treatments of the topic by the FT, Castle et al, Andy Haldane and the Centre for Economic Performance). Output per hour decreased during the last two quarters of 2018 and the first two quarters of 2019. While the United States and other advanced economies have also experienced productivity slowdowns (cf Syverson 2006), the UK slowdown has been more dramatic with the UK ranking 31st out of 35 OECD countries in growth of output per hour from 2008 to 2017 (OECD, 2019, chapter 2). This is despite the fact that the UK is near the top of the league table for ICT-intensive employment, where productivity growth has been the strongest (OECD, 2019, chapter 2).

Riley et al (2019) find that the productivity slowdown has been relatively widespread, while Tenreyro (2018) has suggested that it was confined largely to two sectors: finance and manufacturing. Schneider (2018) suggests that the slowdown is driven by firms at the top of the productivity distribution. These remain the firms with the fastest productivity growth, but they have seen a relatively greater growth deceleration.

There have been two broad categories of explanations for the productivity slowdown. The first focuses on supply-side factors. This category includes employee skills (PWC, 2017), with the UK among the worst in Europe in terms of mismatch between skills and field of employment (OECD, 2017), sluggish investment in research and development (Jones 2018), and global factors, including increases in market power. Oulton (2019) suggests greater labour market flexibility in the UK than in other major economies as an explanation. The second focuses on demand-side factors, implicating the financial crisis, austerity and other causes for slow demand growth in the past decade. (See Mion’s Vox video and a Wren-Lewis 2017 blog post.)

There is a separate, longer-term UK productivity puzzle. UK output per hour has underperformed its G7 peers for several decades. The recent slowdown may be affected by these longer-term trends, but the focus of this survey is on the performance of the UK economy in the past decade.

Related to this debate, the first two questions in the latest CFM survey asked panellists for the two most important causes of the productivity slowdown: 

Question 1: Which was the most important cause for the slowdown in UK productivity growth?

and

Question 2: Which was the second most important cause for the slowdown in UK productivity growth?

Twenty-three panellists responded to these questions. Nearly half of the respondents listed low demand as a factor driving low productivity growth in the past decade, with 40% of respondents listing this factor as the most important cause. The share is even larger when responses are weighted by respondents' degree of confidence.

Respondents pointed to a variety of causes for low demand and productivity, as a result. David Cobham (Heriot-Watt University) suggests that "low demand is mainly down to austerity, a misconceived strategy... whose defects have been highlighted by both academics and the research department of the IMF." Nicholas Oulton (London School of Economics, LSE) points to Brexit and "the slowdown after 2007 in demand for UK exports concentrated as they are on the EU". Wendy Carlin (University College London) explains the channels through which demand factors may affect productivity: "Productivity improvements depend on R&D and on business investment... Both are depressed by low expectations of future market growth, which has been the case since the crisis."

A large number (43%) of respondents also pointed to labour market factors as a drag on productivity, with 17% listing this as the main factor impeding productivity growth. An additional 39% of respondents point to the related issue of workers' skills (with 13% listing this as the primary cause). Chryssi Giannitsarou (Cambridge University) notes that in an accounting sense, the drop in productivity can be largely accounted for with the increase in employment rates. "Therefore labour market factors need to be understood better: for example, demand for new forms of labour types and skills in the last 10-15 years, particularly in the sector of services." Kate Barker (British Coal Staff Superannuation) points to the loss in workers' bargaining power and the "erosion for some young people of a skills premium". Francesca Monti (King's College London) put workers' skills and the mismatch between worker skills and skills needed by employers as central to the productivity decline. Thorsten Beck (Cass Business School) attributes the skill mismatch to a "missing middle" in the UK educational system, which focuses on either academic education or basic skills for low-skilled workers. He remarks that "there is a need for a strong technical education system with apprenticeships as, for example in Germany".

Some respondents question whether productivity was accurately measured or whether the slowdown was a uniquely UK phenomenon. Patrick Minford (Cardiff Business School) notes that the ICT sector is the engine of UK growth and productivity measurement is particularly challenging in this sector. He states that "I certainly find it odd to see widespread pessimism over productivity trends co-existing with equally widespread concerns over the job-destroying effects of ICT." Charles Bean (LSE) suggests that "we should focus on common, rather than the UK-specific, factors," because the slowdown was common across developed nations and pre-dated the financial crisis in the United States. He points, however, to a decline in business dynamism and increased concentration in some markets. 

Policy solutions

With the majority of respondents agreeing that the productivity growth slowdown is more than a statistical artefact, we asked the panel for their policy recommendations to boost UK productivity. Each panel member was allowed to select two policies:

Question 3: Which policy would best help improve private sector productivity?

and

Question 4: Which policy would be your second choice of policy to boost private sector productivity, in addition to or absent your first choice?

Interestingly, although a plurality of panel members see muted demand as the primary cause for the UK productivity puzzle, only a small fraction (16%) of respondents view aggregate demand management as part of the solution. Instead, more than half of respondents (63%) propose investments in human capital, such as education and job retraining as a policy solution. 37% of respondents choose this as the best policy and the remainder as a secondary policy. The share of respondents supporting this view is larger when weighing responses by their degree of confidence.

Thorsten Beck notes that "improvements in technical skills would be a long-term solution to support a well-trained working population and thus also improve productivity growth." Panicos Demetriades (University of Leicester) makes the caveat that investment in education "is the most direct way to improve skills and human capital once we first ensure that the best talent isn’t diverted into unproductive activities and speculation." Charles Bean, doesn't view human capital as a major drag on productivity, but nevertheless suggests that it may be "a key factor behind the UK's pre-existing lagging productivity performance", well pre-dating the recent decade.

A number of respondents relate skills and education to immigration. On the one hand, Ricardo Reis (LSE) proposes that "if fewer high-skilled immigrants want to make the UK its home, the country will have to step up significantly the investment in its universities." On the other hand, Nicholas Oulton suggests that cuts in unskilled immigration could boost productivity as it would induce firms to increase capital investments.

A substantial share (32%) of respondents support infrastructure investments to boost productivity, with 5% selecting this as their preferred policy solution.  Relatedly, a number of panellists suggest that regional investment policies could be part of the policy solution. Respondents differ in the particular investments they supported and several warn that some public investments might be wasteful. Nicolas Oulton warns that public investments may crowd out private investments. David Miles (Imperial College) supports infrastructure investment to link cities to surrounding areas but suggests that "Britain's biggest transport project--HS2--seems an extraordinarily expensive and inefficient way of achieving this."

Other proposals point to tax and regulatory policies, including diversion of resources to the zero-carbon transition (Wendy Carlin), improving business dynamism (Ricardo Reis), and ensuring that the nation's greatest talents aren't sucked in to the financial sector (Panicos Demetriades).

 

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How the experts responded

Question 1

Participant Answer Confidence level Comment
Benjamin Moll's picture Benjamin Moll London School of Economics Low demand (including due to the financial crisis, austerity policies, or Brexit) Not confident at all
David Cobham's picture David Cobham Heriot Watt University Low demand (including due to the financial crisis, austerity policies, or Brexit) Very confident
Over the longer term (beyond 2010 or so) this low demand is mainly down to austerity, a misconceived strategy introduced by the Coalition government and continued by successive Conservative governments, whose defects have been highlighted by both academics and the research department of the IMF. But it’s important to see low demand as interacting with the second factor, as below.
Wendy Carlin's picture Wendy Carlin University College London Low demand (including due to the financial crisis, austerity policies, or Brexit) Confident
Productivity improvements depend on R&D and on business investment (new technology embodied in new equipment, for example). Both are depressed by low expectations of future market growth, which has been the case since the crisis.
Morten Ravn's picture Morten Ravn University College London Human capital including education and employee skills Confident
Before commenting more on human capital, I think measurement - of hours worked in particular - could potentially also be important (and better data would help one understand better how large the decline in labor productivity has been and whether it reflects TFP or not). Human capital though seems to me to be an important issue especially in terms of primary education where lack of investment in high quality state financed eduation has led to a two-tier system which serves well those who can afford private schools but not others. The same is true also for nurseries. I am aware that the survey is specifically asking about UKs experience post-2008. There is probably little doubt that other factors are important for this too. Wage growth has been very modest since the financial crisis and this might have induced poor labor allocation across jobs. Of course, it is unclear why wage growth has been so poor one possible reason being labor supply but others also being possible, It also seems that the poor productivity performance may be concentrated in services where lack of competition may be an issue. But I think it is fair to say that there is no single easy answer to the poor UK productivity performance.
Ricardo Reis's picture Ricardo Reis London School of Economics (Insufficient) investment in research and development Not confident
The slowdown in investment post-Brexit has lowered the capital stock, which lowers output per hour. Before the referendum, a combination of the housing boom, the financial crisis, and misallocation of capital across sectors all in different ways contribute to either too little or mis-directed investment. I picked this option because it was the one closer to "Insufficient investment", but I would not add R&D exclusively to that answer.
Francesca Monti's picture Francesca Monti Kings College London Human capital including education and employee skills Confident
The UK's low productivity in the decade since the financial crisis by is driven a confluence of predominantly supply-side factors, of which the skills mismatch is one of the most prominent. The slowdown was exacerbated, since 2016, by very weak investment caused by the protracted uncertainty about trading arrangements with the EU.
Thorsten Beck's picture Thorsten Beck Cass Business School Low demand (including due to the financial crisis, austerity policies, or Brexit) Very confident
Lack of investment due to the pre-crisis debt hangover and uncertainty related to Brexit are certainly one big factor in explaining low productivity growth in the UK
Sir Charles Bean's picture Sir Charles Bean London School of Economics None of the above, other, or no opinion Not confident
Since the slowdown is common across the developed economies, we should focus on common, rather than the UK-specific, factors. Also in the US, the slowdown dates from before the financial crisis. That said, I think the slowdown is likely to reflect the interaction of several factors that together have resulted in a slowdown in investment in both fixed capital and R&D, as well as reduced entry by new businesses (ie a reduction in the rate of 'creative destruction'). These include: increased concentration in some markets; the impact of the de-risking of bank balance sheets during and after the financial crisis on the availability of funds for investment; the discouraging effect on costly-to-reverse investment of heightened uncertainty following the financial crisis and, latterly, the vote to leave the EU. The flexibility of UK labour markets has amplified the last of these by leading firms to prefer to expand output by taking on more labour rather than expanding capacity. Productivity mis-measurement is also a subsidiary factor in some sectors and industries.
John VanReenen's picture John VanReenen London School of Economics Low demand (including due to the financial crisis, austerity policies, or Brexit) Confident
Confident that this is one factor, but there are many: global slowdown http://cep.lse.ac.uk/pubs/download/dp1496.pdf; financial frictions http://cep.lse.ac.uk/pubs/download/dp1672.pdf. Long-term failure to invest in human capital & infrastructure
Chryssi Giannitsarou's picture Chryssi Giannitsarou University of Cambridge, Faculty of Economics Labour market factors Confident
To a large extent, the productivity slow-down can be mechanically accounted for by the increase in employment rates and the ratio of employment to population. Therefore labour market factors need to be understood better: for example, demand for new forms of labour types and skills in the last 10-15 years, particularly in the sector of services.
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Low demand (including due to the financial crisis, austerity policies, or Brexit) Not confident
The UK productivity slowdown pretty much coincides with the global financial crisis. There is growing evidence and theoretical foundations to the idea that low aggregate demand could lead to lower (measured) productivity either through scale effects or through unobserved capacity utilization.
Paul De Grauwe's picture Paul De Grauwe London School of Economics Human capital including education and employee skills Confident
Patrick Minford's picture Patrick Minford Cardiff Business School Productivity mis-measurement Confident
We know that the CPI measure is vulnerable to quality change, the introduction of new products, and the provision of free goods/services. These features are particularly prominent in ICT-intensive industries which are especially important in the UK's service-dominated economy. If the CPI is overstated it undermines the measures of both productivity and real wages used in this work. I certainly find it odd to see widespread pessimism over productivity trends coexisting with equally widespread concerns over the job-destroying effects of ICT trends. I note that efforts are being made in recent research to improve price measures for the factors identified above- e.g Aghion at https://scholar.harvard.edu/files/aghion/files/firm_dynamics.pdf. But so far little progress seems to have been made by official statistical agencies. Aghion points out that what these agencies do is impute to the new products the same inflation as the old products, then assigning them their sales share weight in the total. However, plainly this disregards the price fall when the new product enters disruptively; think of Amazon shifting us from daily shopping travel to home delivery; or Google saving us the trip to the public library; or tele-commuting in place of distant meetings; or paying fines/taxes online instead of at some tax office. Aghion substitutes the price change from the old substitute to the new product. The result is startling: in France, rather close to the UK in shopping patterns, the inflation rate has been over-stated by 0.7% pa in recent years, and an average of 0.4% pa in the earlier years (vs 0.6% in the US throughout). Notice the increase over the recent past, offsetting a fair proportion of the official slowdown in productivity and real wage growth.
Linda Yueh's picture Linda Yueh London Business School Labour market factors Confident
Alan Sutherland's picture Alan Sutherland University of St. Andrews Productivity mis-measurement Not confident
Nicholas Oulton's picture Nicholas Oulton London School of Economics Low demand (including due to the financial crisis, austerity policies, or Brexit) Very confident
I have argued that the reason why the UK experienced a particularly sharp slowdown in productivity growth was a combination of two factors. First, the slowdown after 2007 in demand for UK exports concentrated as they are on the EU. And second, our very flexible labour market which allowed the labour force to go on rising at the same rate after the crisis hit as before, mainly because of migration. The after effects of the banking crisis may also have impacted negatively.
Lucio Sarno's picture Lucio Sarno Cass Business School Labour market factors Confident
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Low demand (including due to the financial crisis, austerity policies, or Brexit) Confident
Until 2007, the UK largely bucked an international slowdown in productivity growth, partly but not all because of financial services. Since the GFC productivity growth has been below international levels. I have argued that this is associated with two events that greatly increased uncertainty about future demand growth: austerity and the consequent delayed and weak recovery, and Brexit. Without these two events, UK productivity growth would have been closer to international levels.
Costas Milas's picture Costas Milas University of Liverpool Low demand (including due to the financial crisis, austerity policies, or Brexit) Confident
The hope is that productivity will grow stronger once the Brexit issue is settled. Trying to get a deal by the 31st of December might not be realistic though...
Wouter Den Haan's picture Wouter Den Haan London School of Economics None of the above, other, or no opinion Confident
I think that productivity growth was hampered by disruptions in the financial sector which reduced investment and efficient reallocation of capital
Panicos Demetriades's picture Panicos Demetriades University of Leicester (Insufficient) investment in research and development Confident
Reward structure in the U.K. have traditionally favoured finance relative to more productive sectors. The high rewards in finance have misallocated talent in the sense of Acemoglu (reward structures and the allocation of talent, EER 1995). A paper by James Ang in EER 2011 shows that policies that favour the financial sector divert talent into finance from the R&D sector. Ang uses patent data from 44 OECD countries including the U.K. and 22 non OECD countries. Financial deregulation, by increasing the relative rewards in finance, distorts the allocation of human capital and reduces R&D. This is a largely neglected channel in discussions of the U.K. productivity puzzle.
Roger Farmer's picture Roger Farmer University of Warwick Productivity mis-measurement Not confident
Kate Barker's picture Kate Barker British Coal Staff Superannuation Scheme Labour market factors Not confident
Hared to make a choice here - but the loss of labour bargaining power and the apparent erosion for some young people of a skills premium may be linked. The labour market does seem to be working differently and as often discussed this is positive as work is positive for most people - but there are negative impacts too

Question 2

Participant Answer Confidence level Comment
Benjamin Moll's picture Benjamin Moll London School of Economics Human capital including education and employee skills Not confident at all
David Cobham's picture David Cobham Heriot Watt University Labour market factors Very confident
What’s most important here is the wider context of the labour market, that is, the cuts in unemployment and related benefits plus increasing pressures on people to take jobs: these have led to a proliferation by employers of offers of low skill/low wages and terms and conditions /low productivity jobs, which people have been obliged if not compelled to take, even when those jobs do not take them out of poverty. The result is a fall in actual unemployment and in equilibrium unemployment (the NAIRU), which at first glance appears benign or even a success, but in this case is negative for the individuals concerned and highly negative for the longer term health of the economy.
Wendy Carlin's picture Wendy Carlin University College London (Insufficient) investment in research and development Not confident
The logic was explained in the previous comment but it is difficult to know the relative importance of R&D investment as compared with business fixed investment. Measurement issues may also have become more important over the past decade with the increasing role of intangible investment.
Morten Ravn's picture Morten Ravn University College London Low demand (including due to the financial crisis, austerity policies, or Brexit) Confident
As mentioned above, labor market, measurement, goods market may be important. Low demand may of course also be important in terms of landing the economy in a low-growth equilibrium. It is important to consider whether fiscal and monetary policy could be used to address this.
Rachel Ngai's picture Rachel Ngai London School of Economics Labour market factors Confident
Ricardo Reis's picture Ricardo Reis London School of Economics Human capital including education and employee skills Not confident
None of the other factors you list seem to me to be potentially important enough to explain it. But the UK has now for a long time relied on immigration to compensate for missing skills in its labor force.
Francesca Monti's picture Francesca Monti Kings College London (Insufficient) investment in research and development Confident
Thorsten Beck's picture Thorsten Beck Cass Business School Human capital including education and employee skills Very confident
The British education system results in a "missing middle" of well-trained technical staff, with the focus being on the top end (globally competitive universities) and the lower end (minimum wages for low-skilled workers). There is a need for a strong technical education system with apprenticeships as, e.g., in Germany.
Sir Charles Bean's picture Sir Charles Bean London School of Economics None of the above, other, or no opinion Not confident
Since the slowdown is common across the developed economies, we should focus on common, rather than the UK-specific, factors. Also in the US, the slowdown dates from before the financial crisis. That said, I think the slowdown is likely to reflect the interaction of several factors that together have resulted in a slowdown in investment in both fixed capital and R&D, as well as reduced entry by new businesses (ie a reduction in the rate of 'creative destruction'). These include: increased concentration in some markets; the impact of the de-risking of bank balance sheets during and after the financial crisis on the availability of funds for investment; the discouraging effect on costly-to-reverse investment of heightened uncertainty following the financial crisis and, latterly, the vote to leave the EU. The flexibility of UK labour markets has amplified the last of these by leading firms to prefer to expand output by taking on more labour rather than expanding capacity. Productivity mis-measurement is also a subsidiary factor in some sectors and industries.
John VanReenen's picture John VanReenen London School of Economics Labour market factors Confident
UK has had very poor wage growth as result of low productivity growth. If wage growth was stronger (as in other countries), measured labor productivity growth would be higher (but this would not be desirable).
Chryssi Giannitsarou's picture Chryssi Giannitsarou University of Cambridge, Faculty of Economics Human capital including education and employee skills Confident
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Productivity mis-measurement Confident
See above. In addition, productiivty is particularly difficult to measure in the financial sector and the shock to productivity in the crisis was a direct hit to this sector. Further, the sectoral breakdown of the productivity slowdown does appear to be skewed towards this sector. It's very likely that the two combined to show a measured productivity decline that doesn't correspond to any drop in real productivity.
Paul De Grauwe's picture Paul De Grauwe London School of Economics Low demand (including due to the financial crisis, austerity policies, or Brexit) Confident
Patrick Minford's picture Patrick Minford Cardiff Business School Labour market factors Confident
There has been a sharp rise in labour supply in the UK over the past decade, particularly among the self-employed, older workers and women. With such rises in marginal supply, marginal productivity will be lower than average. This factor puts downward pressure on both productivity and wages in the UK's flexible labour market..
Linda Yueh's picture Linda Yueh London Business School Productivity mis-measurement Confident
Alan Sutherland's picture Alan Sutherland University of St. Andrews Human capital including education and employee skills Not confident
Nicholas Oulton's picture Nicholas Oulton London School of Economics None of the above, other, or no opinion Very confident
The second most important cause was the continuing rise in the labour force, mainly due to migration and made possible by our flexible labour market. In all EU countries demand for exports slowed down as a result of the Great Recession. In most other EU countries this led to rising unemployment and falling employment, with labour productivity less affected. But in the UK employment rose at the same rate after the crisis as before, mainly due to migration. So inevitably productivity growth fell, as business investment declined and capital deepening flatlined.
Lucio Sarno's picture Lucio Sarno Cass Business School (Insufficient) investment in research and development Confident
Costas Milas's picture Costas Milas University of Liverpool (Insufficient) investment in research and development Confident
Wouter Den Haan's picture Wouter Den Haan London School of Economics Labour market factors Confident
The UK economy did well in terms of the decline in the unemployment rate following the massive downturn. But the downside of this is that workers will not always find the best match and reach their potential
Panicos Demetriades's picture Panicos Demetriades University of Leicester Human capital including education and employee skills Confident
See my above analysis - which can justify all three mechanisms at play, human capital misallocation, insuffficient investment in R&D and labour market conditions. On top of that, the crisis and the austerity policies that followed because of the large fiscal costs of bailing out banks have impacted negatively on public capital investments including schools, hispoitals and education, aggravated income inequality and increased uncertainty, eventually leading to Brexit and even more uncertainty. How can we expect private investment that enhances long run growth and productivity after that? It’s important to understand the deeper cause of all this - unregulated finance. Even within economics, the best talent isn’t allocated to understanding this, macroeconomists continue to be ignorant of banks, default and financial regulation.
Roger Farmer's picture Roger Farmer University of Warwick Labour market factors Not confident
Kate Barker's picture Kate Barker British Coal Staff Superannuation Scheme None of the above, other, or no opinion Not confident
Other - low investment generally and weak diffusion of the benefits of the R and D that is undertaken.

Question 3

Participant Answer Confidence level Comment
Benjamin Moll's picture Benjamin Moll London School of Economics None of the above, other, or no opinion Not confident at all
David Cobham's picture David Cobham Heriot Watt University Aggregate demand management through fiscal and/or monetary policy Very confident
There needs to be a gradual but sustained reversal of the public expenditure cuts involved in the decade of austerity – not just a large increase in NHS spending plus a few large infrastructural projects, but a reversal of the cuts in other areas such as education and, above all, local authority funding. This in turn will encourage a revival of private sector investment.
Wendy Carlin's picture Wendy Carlin University College London None of the above, other, or no opinion Confident
Aggregate demand has recovered and unemployment is very low but investment and productivity growth remain weak reflecting weak confidence of business in the future growth of their markets. Policies to reduce uncertainty about demand management (in the event of a recession) and to direct innovation - for the zero carbon transition, for example, are likely to be helpful.
Ricardo Reis's picture Ricardo Reis London School of Economics Regulatory and competition policies, possibly including financial regulation Confident
Much could be done to foster more dynamism in the UK economy, and to remove distortions in the allocation of capital.
Francesca Monti's picture Francesca Monti Kings College London Investments in human capital including education and job retraining Confident
Thorsten Beck's picture Thorsten Beck Cass Business School Investments in human capital including education and job retraining Very confident
Improvements in technical skills would be a long-term solution to support a well-trained working population and thus also improve productivity growth
Sir Charles Bean's picture Sir Charles Bean London School of Economics Investments in human capital including education and job retraining Confident
While human capital is not the main reason for the slowdown in productivity growth since the financial crisis, the UK's relatively poor skill levels (including those of management) appear to be a key factor behind the UK's pre-existing lagging productivity performance (i.e. the second puzzle referred to above). We may not yet fully understand the reasons behind the slowdown but UK policy makers can at least attempt to tackle these long-standing deficiencies.
Chryssi Giannitsarou's picture Chryssi Giannitsarou University of Cambridge, Faculty of Economics Investments in human capital including education and job retraining Confident
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Investments in human capital including education and job retraining Confident
Although I do think the productivity decline may have been driven by low demand, I don't think it's possible at this point to resolve the crisis through pure demand-side measures. I think the policies should focus more on increasing the UK economy's long run potential as a producer of high-skilled goods on the technological frontier. The only way to boost capacities and reduce inequalities is by preparing the workforce to these emerging industries.
Paul De Grauwe's picture Paul De Grauwe London School of Economics Investments in human capital including education and job retraining Confident
Patrick Minford's picture Patrick Minford Cardiff Business School None of the above, other, or no opinion Confident
I am unconvinced there is a 'productivity problem' to be solved here as explained above. In general I am in favour of policies to strengthen the supply-side via lower taxes and supportive public spending policies, regardless of the issues raised here.
Linda Yueh's picture Linda Yueh London Business School None of the above, other, or no opinion Not confident
Alan Sutherland's picture Alan Sutherland University of St. Andrews Investments in human capital including education and job retraining Not confident
Nicholas Oulton's picture Nicholas Oulton London School of Economics Tax and subsidy policies Very confident
Given my answers to Questions 1 and 2, the first best policy would be to revive demand in the rest of the EU. But this is not within the UK’s power. So my preferred policy is to increase incentives for business investment of all types in a radical way, say by giving 100% investment allowances against corporation tax in the first year. Infrastructure investment may help here too as it may crowd in some business investment.
Lucio Sarno's picture Lucio Sarno Cass Business School Infrastructure investment Confident
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Aggregate demand management through fiscal and/or monetary policy Confident
See earlier comment
Wouter Den Haan's picture Wouter Den Haan London School of Economics Regulatory and competition policies, possibly including financial regulation Confident
Panicos Demetriades's picture Panicos Demetriades University of Leicester Regulatory and competition policies, possibly including financial regulation Very confident
In the long run, reward structures in finance should be more in line with productive sectors, so that more human capital is attracted to R&D and innovation. Although there has been progress in financial regulation since the crisis, more needs to be done to ensure that talent is more evenly distributed across the economy and that more talent is directed into R&D. Competition policy can help change relative rewards to facilitate that.
Roger Farmer's picture Roger Farmer University of Warwick None of the above, other, or no opinion Not confident

Question 4

Participant Answer Confidence level Comment
Benjamin Moll's picture Benjamin Moll London School of Economics None of the above, other, or no opinion Not confident at all
David Cobham's picture David Cobham Heriot Watt University None of the above, other, or no opinion Very confident
There needs to be a gradual but sustained reversal of the benefits cuts and the excessive pressures on people to take poor-quality jobs that have been introduced in the last decade (without abandoning the basic idea of ‘universal’ benefits), combined with investments in human education, notably via FE colleges and apprenticeships, so that individuals can more easily choose to get some retraining before re-entering the labour market at a higher point (and with higher skills).
Wendy Carlin's picture Wendy Carlin University College London None of the above, other, or no opinion Confident
See previous comment.
Ricardo Reis's picture Ricardo Reis London School of Economics Investments in human capital including education and job retraining. Not confident
If fewer high-skilled immigrants want to make the UK its home, the country will have to step up significantly the investment in its universities.
Francesca Monti's picture Francesca Monti Kings College London Tax and subsidy policies Confident
Thorsten Beck's picture Thorsten Beck Cass Business School Infrastructure investment Very confident
Helping regions outside the South of England and London to get better connected would make them more attractive investment targets, with positive externalities across firms and sectors in these locations.
Sir Charles Bean's picture Sir Charles Bean London School of Economics Regulatory and competition policies, possibly including financial regulation Confident
Suitable reforms to financial markets and executive remuneration packages could encourage businesses and their owners to adopt a longer-term perspective and foster a higher rate of investment.
Chryssi Giannitsarou's picture Chryssi Giannitsarou University of Cambridge, Faculty of Economics Infrastructure investment Confident
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Infrastructure investment Not confident
Paul De Grauwe's picture Paul De Grauwe London School of Economics Aggregate demand management through fiscal and/or monetary policy Confident
Linda Yueh's picture Linda Yueh London Business School Tax and subsidy policies Not confident
Alan Sutherland's picture Alan Sutherland University of St. Andrews Infrastructure investment Not confident
Nicholas Oulton's picture Nicholas Oulton London School of Economics None of the above, other, or no opinion Very confident
Given my answers to questions 1 and 2, my second favourite policy (after incentives for business investment) is to cut unskilled immigration radically. This would reinforce the business case for capital deepening and so raise productivity.
Lucio Sarno's picture Lucio Sarno Cass Business School Investments in human capital including education and job retraining. Not confident
David Miles's picture David Miles Imperial College Infrastructure investment Confident
Better links into big cities from areas around them would help a great deal. Unfortunately Britain's biggest transport project - HS2 - seems an extraordinarily expensive and inefficient way of achieving this.
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford None of the above, other, or no opinion Confident
Brexit will reduce UK productivity for well known reasons. The more difficult the government chooses to make it to trade with the EU, the greater the productivity loss.
Wouter Den Haan's picture Wouter Den Haan London School of Economics Investments in human capital including education and job retraining. Confident
Panicos Demetriades's picture Panicos Demetriades University of Leicester Investments in human capital including education and job retraining. Extremely confident
Clearly education is the most direct way to improve skills and human capital once we first ensure that the best talent isn’t diverted into unproductive activities and speculation. Public investment p in schools and universities is essential to improve human capital.
Roger Farmer's picture Roger Farmer University of Warwick Investments in human capital including education and job retraining. Not confident at all