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The UK productivity and jobs puzzle: does the answer lie in labour market flexibility?

Pessoa, João Paulo and Van Reenen, John (2013) The UK productivity and jobs puzzle: does the answer lie in labour market flexibility? CEP Special Reports (CEPSP31). The London School of Economics and Political Science, Center of Economic Performance, London, UK.

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Abstract

GDP per worker fell for the five years after 2008 which is unprecedented in post war UK history. In this paper we argue that “capital shallowing” (i.e. the fall in the capital-labour ratio) could be the main reason for this. This is likely to have occurred due to changes in factor prices: a large fall in real wages and increases in the cost of capital. In previous recessions real wages did not fall, but reforms to union strength and welfare have made wages more sensitive to negative demand shocks. This wage flexibility is desirable as it reduces the risks of long-term unemployment building up. After accounting for changes in capital TFP is more similar to earlier recessions and likely to be related to under-utilised resources and misallocation. The fall in labour productivity is therefore likely to reverse if demand improves – e.g. through stronger monetary or fiscal policy stimulus.

Item Type: Monograph (Report)
Official URL: http://cep.lse.ac.uk/
Additional Information: © 2013 The Authors
Divisions: Economics
Centre for Economic Performance
Subjects: H Social Sciences > HB Economic Theory
Sets: Departments > Economics
Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 18 Jul 2014 11:19
Last Modified: 22 Jan 2020 00:31
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/58010

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