UK productiveness puzzle – a manufacturing community perspective – Financial institution Underground


Marko Melolinna

Enter/output networks are necessary in propagating shocks in an financial system. For understanding the mixture results of shocks, it’s helpful to know which sectors are central (ie, offering a variety of inputs to a variety of different sectors) and the way the central sectors are affected by and propagate the shocks to different sectors. In a brand new Employees Working Paper, my co-author and I construct a structural mannequin incorporating key options of the sectoral manufacturing enter/output community within the UK, after which use the mannequin to assist us perceive UK productiveness dynamics for the reason that international monetary disaster (GFC). We discover that the slower productiveness progress charges for the reason that GFC are primarily because of unfavorable shocks originating from the manufacturing sector.

We construct a mannequin to accommodate manufacturing networks…

In our paper, we first spotlight some key details on the manufacturing community of the UK financial system to encourage our structural mannequin. We present that the UK manufacturing community, by way of the enter/output linkages of various sectors, has important asymmetries. Which means a small variety of sectors are very central within the community. We additionally present that the community adjustments over time, and there tends to be a constructive correlation between actual sectoral output and centrality (measured by the so-called ‘weighted outdegree’ (for a exact definition, see Acemoglu et al (2012))) for many sectors. In different phrases, as sectors turn out to be greater, additionally they are inclined to turn out to be extra central.

Impressed by earlier analysis (see, for instance, Atalay (2017) and Acemoglu et al (2012)), we then arrange a structural mannequin that might clarify these key empirical options of the info. The mannequin contains utility-maximising households and profit-maximising corporations. The manufacturing community within the mannequin arises as a result of corporations within the mannequin can supply intermediate inputs from different sectors.

A vital, and novel, function of our mannequin is its skill to elucidate the constructive empirical size-centrality relationship talked about above. Our mannequin is ready to do that, as a result of we introduce demand-side shocks along with supply-side know-how shocks into the mannequin. A constructive know-how shock to a sector causes output costs of the sector to fall (worth impact) and actual output to rise (amount impact). Sometimes in these kinds of fashions, the worth results dominates the amount impact, implying a unfavorable impact of the know-how shock on centrality, and therefore a unfavorable correlation between actual output (measurement) and centrality. This goes towards the real-world truth talked about above. Nevertheless, we present that together with a requirement shock within the mannequin, we will reconcile the mannequin final result with the info for many sectors within the UK financial system. It is because the demand shock implies constructive results on costs and on actual output and therefore a constructive size-centrality relationship.

…after which use the mannequin to review UK productiveness progress by sector

Along with analysing the empirical and model-implied relationship between measurement and centrality, we additionally examine the UK’s productiveness progress slowdown following the GFC of 2008–09. We do that by casting the slowdown right into a manufacturing community context through which producer measurement and centrality play a job. Earlier work has targeted on decomposing the UK productiveness progress ‘puzzle’ in an accounting sense (see, for instance, Riley et al (2015) and Tenreyro (2018)). Whereas insightful, such analyses don’t establish the underlying shocks, nor do they distinguish idiosyncratic versus frequent shocks as potential drivers of the expansion puzzle. In different phrases, does the slowdown in UK productiveness progress mirror shocks originating from particular sectors, or do they mirror frequent shocks? In an empirical software of our mannequin, we goal to make clear this query. We do that through the use of sectoral worth added and employment information. We will filter out model-implied idiosyncratic sectoral shocks in addition to a standard shock element over time, after which examine the contributions of those shocks to mixture productiveness dynamics within the UK.

The UK skilled comparatively sturdy productiveness progress previous to the onset of the GFC, with a transparent slowdown of productiveness progress post-crisis. Many authors have referred to this slowdown because the UK’s productiveness progress puzzle. A handy solution to perceive the expansion puzzle is to think about it because the distinction between common post-crisis and pre-crisis progress. Treating the interval from 1999 Q1–2007 This autumn as ‘pre-crisis’, and 2010 Q1–2019 This autumn as ‘post-crisis’, we will calculate the scale of the expansion puzzle to be -0.26 proportion factors. In different phrases, on common, UK productiveness progress has been 0.26 proportion factors per quarter slower after than earlier than the GFC.

We will perform an accounting train, the place we calculate the contribution of every sector to the productiveness progress puzzle, relying on the scale of the sector and its productiveness dynamics. After we do this, we discover that the expansion puzzle is to a big extent pushed by the manufacturing sector (blue bars in Chart 1). Though they’re considerably smaller, the unfavorable contributions from finance and ICT sectors are additionally non-negligible. However importantly, these contributions mirror doubtlessly all underlying shocks, be it {industry} particular or frequent. In different phrases, they don’t have in mind the propagation within the enter/output networks in our mannequin.

In distinction, our mannequin permits us to decompose mixture labour productiveness progress into the contributions from the underlying shocks, together with any frequent shocks. So the entire contribution of the idiosyncratic shock to, say, finance will embrace its impact on mixture labour productiveness through doubtlessly all industries, not solely finance.

After we perform this train with our mannequin, we will examine the contributions of idiosyncratic and customary shocks to the expansion puzzle, to these from the accounting train. Total, our outcomes recommend that industry-specific shocks have been the principle drivers of the slowdown seen in UK productiveness progress for the reason that GFC, as much as 2019. By far the most important unfavorable shock has been seen within the manufacturing sector, which, in accordance with our mannequin, greater than explains the mixture progress puzzle. The purple bars in Chart 1 present that the drag from extra unfavorable manufacturing-specific shocks post-crisis has been massive, at -0.65 proportion factors per quarter. The manufacturing sector has made in particular massive unfavorable contributions since 2016. In distinction, some sectors, most notably, administrative and help providers actions (Admin & Assist in Chart 1) and mining and quarrying (Mining) have skilled considerably extra constructive shocks post-crisis relative to pre-crisis than their accounting contributions (reflecting probably all shocks) would recommend. We will additionally see from the chart that in accordance with our mannequin, frequent shocks have made a constructive contribution for the reason that GFC.

Chart 1: Contributions to the expansion puzzle: sectors versus shocks (proportion factors)

We additionally examine UK productiveness dynamics throughout the Covid-19 (Covid) pandemic by extending the pattern to 2020–21. After we have a look at the contributions of shocks, our mannequin means that the preliminary sharp downturn in 2020 in addition to the following leap within the progress of mixture productiveness are primarily attributable to a standard shock. This result’s intuitive given the character of the underlying pandemic shock, which entailed broad-based restrictions on social and financial exercise. Nevertheless, given the intense measurement of the shock and the volatility within the information, our outcomes for this episode needs to be interpreted with warning.

In conclusion, our evaluation highlights the significance of fascinated with linkages between sectors and corporations when learning the mixture impacts of financial shocks. For instance, shocks to costs and output within the crude oil extraction {industry} can have important penalties for the petroleum manufacturing {industry}, and propagate additional to the transport sector. Our mannequin permits us to measure the mixture results of such shocks. After we use the mannequin to have a look at the current productiveness progress puzzle within the UK, we discover the position of the manufacturing sector to be far more necessary than different sectors. Based mostly on the mannequin, frequent shocks haven’t been necessary drivers of the puzzle, though they’ve pushed all of the volatility in productiveness progress seen throughout the Covid pandemic.

Marko Melolinna works within the Financial institution’s Structural Economics Division.

If you wish to get in contact, please electronic mail us at or go away a remark beneath.

Feedback will solely seem as soon as authorized by a moderator, and are solely printed the place a full identify is equipped. Financial institution Underground is a weblog for Financial institution of England employees to share views that problem – or help – prevailing coverage orthodoxies. The views expressed listed here are these of the authors, and will not be essentially these of the Financial institution of England, or its coverage committees.


Please enter your comment!
Please enter your name here