UK productivity puzzle – a production network perspective – Bank Underground

Marko Melolinna

Enter/output networks are vital in propagating shocks in an economic system. For understanding the combination 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 on account of unfavourable shocks originating from the manufacturing sector.

We construct a mannequin to accommodate manufacturing networks…

In our paper, we first spotlight some key info on the manufacturing community of the UK economic system to encourage our structural mannequin. We present that the UK manufacturing community, when it comes to the enter/output linkages of various sectors, has vital asymmetries. Which means that a small variety of sectors are very central within the community. We additionally present that the community modifications 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 into larger, additionally they are inclined to turn into extra central.

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

An important, and novel, characteristic of our mannequin is its capacity to clarify the constructive empirical size-centrality relationship talked about above. Our mannequin is in a position 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 a majority of these fashions, the worth results dominates the amount impact, implying a unfavourable impact of the know-how shock on centrality, and therefore a unfavourable correlation between actual output (measurement) and centrality. This goes towards the real-world truth talked about above. Nonetheless, we present that together with a requirement shock within the mannequin, we are able to reconcile the mannequin final result with the information for many sectors within the UK economic 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 check 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 task. 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 widespread 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 widespread shocks? In an empirical software of our mannequin, we intention to make clear this query. We do that through the use of sectoral worth added and employment knowledge. We will filter out model-implied idiosyncratic sectoral shocks in addition to a standard shock part over time, after which examine the contributions of those shocks to combination 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 technique to perceive the expansion puzzle is to consider 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 are able to calculate the scale of the expansion puzzle to be -0.26 share factors. In different phrases, on common, UK productiveness progress has been 0.26 share 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. Once 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 unfavourable contributions from finance and ICT sectors are additionally non-negligible. However importantly, these contributions mirror doubtlessly all underlying shocks, be it {industry} particular or widespread. In different phrases, they don’t consider the propagation within the enter/output networks in our mannequin.

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

Once we perform this train with our mannequin, we are able to examine the contributions of idiosyncratic and customary shocks to the expansion puzzle, to these from the accounting train. General, 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 biggest unfavourable shock has been seen within the manufacturing sector, which, in accordance with our mannequin, greater than explains the combination progress puzzle. The purple bars in Chart 1 present that the drag from extra unfavourable manufacturing-specific shocks post-crisis has been giant, at -0.65 share factors per quarter. The manufacturing sector has made in particular giant unfavourable contributions since 2016. In distinction, some sectors, most notably, administrative and help companies 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 presumably all shocks) would recommend. We will additionally see from the chart that in accordance with our mannequin, widespread shocks have made a constructive contribution for the reason that GFC.

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

We additionally examine UK productiveness dynamics throughout the Covid-19 (Covid) pandemic by extending the pattern to 2020–21. Once we take a look at the contributions of shocks, our mannequin means that the preliminary sharp downturn in 2020 in addition to the next soar within the progress of combination 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. Nonetheless, given the acute measurement of the shock and the volatility within the knowledge, our outcomes for this episode needs to be interpreted with warning.

In conclusion, our evaluation highlights the significance of excited about linkages between sectors and companies when finding out the combination impacts of financial shocks. For instance, shocks to costs and output within the crude oil extraction {industry} can have vital penalties for the petroleum manufacturing {industry}, and propagate additional to the transport sector. Our mannequin permits us to measure the combination results of such shocks. Once 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 vital than different sectors. Based mostly on the mannequin, widespread shocks haven’t been vital 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.

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