Productivity Dynamics in the Great Stagnation: Evidence from British Businesses

Rebecca Riley*, Chiara Rosazza Bondibene* and Garry Young**

*National Institute of Economic and Social Research & CFM**Bank of England & CFM

9 April 2014RES 2014 Annual Conference, Manchester

Disclaimers: Any views expressed cannot be taken to represent those of the Bank of England or to state Bank of England policy.This work contains statistical data which is Crown Copyright; it has been made available by the Office for National Statistics (ONS) through the Secure Data Service (SDS) and has been used by permission. Neither the ONS nor SDS bear any responsibility for the analysis or interpretation of the data reported here. This work uses research datasets which may not exactly reproduce National Statistics aggregates.Acknowledgements: The financial support of the Economic and Social Research Council grant reference ES/K00378X/1 is gratefully acknowledged.

• Any views expressed cannot be taken to represent those of the Bank of England or to state Bank of England policy.

• This work contains statistical data which is Crown Copyright; it has been made available by the Office for National Statistics (ONS) through the Secure Data Service (SDS) and has been used by permission. Neither the ONS nor SDS bear any responsibility for the analysis or interpretation of the data reported here. This work uses research datasets which may not exactly reproduce National Statistics aggregates.

Disclaimers

Motivation

Stylised facts

• There was a measurable credit crunch in the UK in 2007/8 with credit supply reduced by 20%

• UK labour productivity fell sharply during the recession of 2008-9 and recovered only sluggishly after that

• In level terms productivity is currently around 15% below a simple extrapolation of its pre-crisis trend

• In sharp contrast with the experience of other post-war recessions in the UK when the fall was less steep and the recovery was quicker

Motivation

A possible channel why financial crises lead to permanent losses of output is the reduction of resource allocation across businesses, which hinders one of the key mechanism through which productivity growth arises

We investigate to what extent the weakness in productivity in the aftermath of the global financial crisis of 2007/2008 may be due to:

• a reduction in the allocation of resources between high and low productivity firms which might occur through:

resource misallocation between existing firms a lack of creative destruction

• a widespread productivity shock occurring within firms

Possible explanationsReasons why the impacts of a banking crisis on economic performance are exacerbated by impaired resource allocation in the economy:

• The cleansing effects of recession (Caballero and Hammour, 1994) may be depressed when capital markets are imperfect and firms face credit constraints

Caballero and Hammour (2005) Berlevy (2003)

• Bank forbearance leads to the existence of zombie companies as troubled banks seek to avoid crystallising losses on their balance sheets

Peek and Rosengreen (2005) Caballero, Hoshi and Kashyap (2008)

Related literature

Other studies analyse the pattern of productivity dynamics in the wake of the financial crisis:

•Japan during the 1990sGriffin and Odaki (2009)

•US manufacturing firms during the Great Recession Foster Grim and Haltiwanger (2013)

Decomposition of aggregate productivity growthWe start by writing aggregate productivity at time t () as a share-weighted average of the productivity of individual firms (:

where is a measure of firm i's market share at time t, and

We then decompose the change in share weighted firm productivity between time t-k and time t into 4 components:

Within Between

Entry Exit

This decomposition is an hybrid between two other decompositions used in the literature: Different reference productivity for entrants, exitors and stayers as in Melitz and Polanec (2013) Within effect calculated using a share-weighted mean and continuing firms’ market share

normalised on the total market share of continuers by revising the approach of Griliches and Regev (1995)

Data: the Annual Respondents Database (ARD)• Establishment level survey which covers businesses in the non-financial

non-farm market sectors• Data available for 1997-2011 and for manufacturing back to 1974• A census of larger businesses and a stratified random sample of businesses

with less than 250 employees• It contains also basic information for all businesses in the sampling frame

(the IDBR, a list of all UK businesses registered for tax purposes) which allows to:

Determine business entry and exit Calculate grossing weights

• We focus on the longitudinal sample of firms with 10 or more employees since it is insufficient to support representative analysis of micro firms:

The probability of observing a micro business in two separate years (conditional on being live) is only 1 in 10,000

• We aggregate the data up to the enterprise level, as banking relationships are more likely to take place at this level of aggregation

• Financial information is published in current values GVA deflators available at 2- and 3-digit sector level are used to construct real values

TRENDS IN LABOUR PRODUCTIVITY, UK 2001-2012

•Differences between the series expected because of differences in sector and size coverage and in cleaning and weighting procedures• All these series exhibit broadly the same pattern over time, with labour productivity in 2011 a little more than 10% below a simple linear extrapolation of the trend 2001-2007

80

85

90

95

100

105

110

115

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

ARD decomposition sample ABI & ABS Market sector

BUSINESS EXIT AND ENTRY RATES

• At any point in time more than a third of live businesses will have entered the market over the last four years and more than a third will die over the next four years• Dip in annual entry rate of around 2% between 2009 and 2010 (not shown). This drop is more evident in the 4 year entry rate which will reflect cumulated changes in annual entry rates• Rise in 4 year exit rates after 2004, when surviving 4 years into the future meant surviving the crisis

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110.1

0.2

0.3

0.4

0.5

0.6

0.7

Exit by t+4 (Excl. micro firms) Exit by t+4Entry since t-4 (Excl. micro firms) Entry since t-4

Shar

e of

ent

erpr

ises

LABOUR PRODUCTIVITY BY 4 YEAR SURVIVAL STATUS

• It is the low productivity firms that exit. Firms that will die in the next 4 years are 17% less productive that firms that will not die• Labour productivity among entrants is low relative to incumbents (entrants are less capital intensive and have the scope to grow) but the gap is smaller than for exit.

25

30

35

40

45

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GV

A p

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ad

(£

10

00

, 20

08

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ces)

Continuer to t+4 Exit by t+4 Continuer from t-4 Entry since t-4

DECOMPOSITION OF 4-YEAR CHANGES IN LABOUR PRODUCTIVITY Growth components External Growth Employment shares Sample sizes

Within Between Entry ExitNet

entry Total TotalProductivity growth (%)

2007-2011 OURS -12.3 7.2 -2.0 4.6 2.6 9.8 -2.5 Continuers 4945FHK -4.6 0.3 -2.0 3.8 1.8 2.1 -2.5 Entrants 0.107 Entrants 3159GR -10.9 6.6 -1.9 3.6 1.8 8.4 -2.5 Exits 0.164 Exits 4308MP -16.4 11.3 -2.0 4.6 2.6 13.9 -2.5

2003-2007 OURS 4.9 6.6 -1.4 3.8 2.4 9.0 13.9 Continuers 6953FHK 11.6 -1.1 0.3 3.0 3.4 2.3 13.9 Entrants 0.115 Entrants 4268GR 3.7 6.2 -0.4 4.4 4.0 10.2 13.9 Exits 0.202 Exits 5704MP 5.4 6.2 -1.4 3.8 2.4 8.5 13.9

2001-2005 OURS 4.2 0.7 -0.9 2.7 1.9 2.6 6.8 Continuers 7420FHK 9.1 -4.5 0.0 2.1 2.1 -2.3 6.8 Entrants 0.110 Entrants 4259GR 3.1 1.2 -0.4 2.9 2.5 3.7 6.8 Exits 0.219 Exits 6338MP 0.8 4.2 -0.9 2.7 1.9 6.0 6.8

Productivity growth change (% points)

2003-2007 to 2007-2011 OURS -17.2 0.6 -0.6 0.8 0.3 0.8 -16.4FHK -16.3 1.4 -2.4 0.8 -1.5 -0.2 -16.4GR -14.6 0.4 -1.4 -0.8 -2.2 -1.8 -16.4MP -21.8 5.1 -0.6 0.8 0.3 5.4 -16.4

2001-2005 to 2007-2011 OURS -16.6 6.5 -1.1 1.9 0.8 7.3 -9.3FHK -13.8 4.8 -2.0 1.7 -0.3 4.5 -9.3GR -14.0 5.4 -1.5 0.8 -0.7 4.7 -9.3MP -17.2 7.1 -1.1 1.9 0.8 7.9 -9.3

DECOMPOSITION OF 1-YEAR CHANGES IN LABOUR PRODUCTIVITY, MANUFACTURING, 2003-2010

•The slowdown in manufacturing productivity growth in 2008-2010 arises because of a slowdown in productivity growth WITHIN firms•The contribution from external restructuring over the same period is similar to the pre-crisis years

-4%

-2%

0%

2%

4%

6%

2004 2005 2006 2007 2008 2009

per

an

nu

m

External Within Total

DECOMPOSITION OF 1-YEAR CHANGES IN LABOUR PRODUCTIVITY, MANUFACTURING, 1985-1992

•During the 1980s and early 1990s it was also the WITHIN component that drove changes in productivity growth over time but it fell back less than it did in the current recession• This is why a stagnation in productivity growth was avoided (and not because the cleansing effects of the recession were stronger)

-4%

-2%

0%

2%

4%

6%

1986 1987 1988 1989 1990 1991

per

annu

m

External Within Total

EXTERNAL RESTRUCTURING AND PRODUCTIVITY GROWTH, MANUFACTURING, 1985-1992 and 2003-2010

•After the recession in 1990 the contribution of external restructuring was slightly higher than before•This is in contrast to the recession of 2008 after which the contribution from restructuring fell back a bit

0.0%

0.4%

0.8%

1.2%

1.6%

2.0%

2004 2005 2006 2007 2008 2009

1986 1987 1988 1989 1990 1991

con

trib

uti

on

per

an

nu

m

2000s 1980s/90s

EXTERNAL RESTRUCTURING AND PRODUCTIVITY GROWTH, MANUFACTURING SMEs, 1985-1992 and 2003-2010

•The contribution of external restructuring fell back during the Great Stagnation to a level that was lower than any point since 2004•In contrast, after the recession in 1990 the contribution of external restructuring was higher than before• The offset to the productivity drop within firms that was provided by external restructuring have been more muted during the current recession

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

2004 2005 2006 2007 2008 2009

1986 1987 1988 1989 1990 1991

con

trib

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per

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nu

m, 1

98

0s/

90

s

con

trib

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per

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nu

m, 2

00

0s

2000s 1980s/90s

SECTORAL BANK DEPENDENCE

•Using FAME we evaluate sectoral bank dependence by the proportion of businesses within a sector that have an outstanding bank charge•The table ranks sectors according to their bank dependence before the crisis

Sector Proportion of active non-financial businesses with a charge outstanding

Manufacturing 0.48

Construction 0.39

Wholesale & Retail 0.39

Accommodation & Food 0.37

Transport & Storage 0.28

Arts & Entertainment 0.21

Administration & Support 0.21

Professional & Scientific 0.18

Information & Communication 0.13

EXTERNAL RESTRUCTURING AND PRODUCTIVITY GROWTH, SERVICE SECTOR SMEs, 2002-2011

• On average 2004-2006 external restructuring contributed approximately 4 % points to annual productivity growth• Bank dependent sector group: the contribution of external restructuring fell sharply following the financial crisis. The picture is very different for the least bank dependent group where the contribution was 1% point higher in 2009-2011 than 2004-2006

0%

1%

2%

3%

4%

5%

6%

7%

2003 2004 2005 2006 2007 2008 2009 2010

con

trib

uti

on

per

an

nu

m

Bank dependent sectors Not bank dependent sectors Other sectors

Conclusions•The major part of the decline in UK productivity growth following the financial crisis is explained by a widespread productivity shock WITHIN firms

•While the crisis did hamper resource allocation to some extent, a misallocation of resources across firms, caused by an adverse credit supply shock, is unlikely to be the key factor behind the stagnation of UK productivity

•In contrast with the experience during the 80s and early 90s, the productivity contributions of resource reallocation fell during the Great Stagnation to a level that was lower than any point since 2002 among smaller businesses in bank-dependent manufacturing sector

•In contrast with the experience in service sectors than do not rely on bank finance, the productivity contributions of resource reallocation fell sharply between 2007 and 2011 among smaller businesses in bank-dependent service sectors

Thanks for your attention

r.riley@niesr.ac.ukc.rosazza_bondibene@niesr.ac.uk