Oulton, Nicholas and Sebastiá-Barriel, María
Long and short-term effects of the financial crisis on labour productivity, capital and output.
CEP Discussion Papers,
Centre for Economic Performance, London School of Economics and Political Science, London, UK.
The behaviour of labour productivity in the United Kingdom since the onset of the recessionin early 2008 constitutes a puzzle. Over four years after the recession began labourproductivity is still below its previous peak level. This paper considers the hypothesis thateconomic capacity can be permanently damaged by financial crises. A model which allows afinancial crisis to have both a short-run effect on the growth rate of labour productivity and along-run effect on its level is estimated on a panel of 61 countries over 1955-2010. The mainfinding is that a banking crisis as defined by Reinhart and Rogoff on average reduces theshort-run growth rate of labour productivity by between 0.6 and 0.7 per year and thelong-run level by between 0.84 and 1.1 (depending on the method of estimation), foreach year that the crisis lasts. A banking crisis also reduces the long-run level of capital perworker by an average of about 1. The effect on GDP per capita is about double the effecton GDP per worker since there is a long-run, negative effect on the employment ratio.
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