Long and Short-Term Effects of the Financial Crisis on Labour Productivity, Capital and Output

Abstract

The behaviour of labour productivity in the United Kingdom since the onset of the recession in early 2008 constitutes a puzzle. Over four years after the recession began labour productivity is still below its previous peak level. This paper considers the hypothesis that economic capacity can be permanently damaged by financial crises. A model which allows a financial crisis to have both a short-run effect on the growth rate of labour productivity and a long-run effect on its level is estimated on a panel of 61 countries over 1955-2010. The main finding is that a banking crisis as defined by Reinhart and Rogoff on average reduces the short-run growth rate of labour productivity by between 0.6% and 0.7% per year and the long-run level by between 0.84% and 1.1% (depending on the method of estimation), for each year that the crisis lasts. A banking crisis also reduces the long-run level of capital per worker by an average of about 1%. The effect on GDP per capita is about double the effect on GDP per worker since there is a long-run, negative effect on the employment ratio.JEL Classifications: E23, E32, J24, O47

Accounting for the UK Productivity Puzzle: A Decomposition and Predictions

“…At most, assuming full catch-up, this could add around 1 percentage point per annum to TFP growth and this would leave TFP growth close to its average growth rate in the decade after the 1990s recession. Oulton and Sebastiá-Barriel (2013) find that banking crises reduce short short-term productivity growth such that the long-term level is lower than it would have been had the crisis not 42 Data kindly provided by Antonin Bergeaud. 43 Estimates for 2000-07 are from the industry dataset in this paper and are extended to 1990-2007 using the market sector dataset, using capital services and accounting for labour composition.…”

The interactions between wages and productivity nurturing the country’s competitiveness

“…In addition, in order to reveal the strength of the interaction between labour productivity and wage was carried out correlation and regression analysis (Oulton, Sebastia-Barriel 2013;Čekana-vičius, Murauskas 2014;Dudzevičiūtė, Čekanaus-kas 2014). This analysis was used to find the correlation coefficient, determination coefficient and regression equation.…”

The United Kingdom productivity paradox: Myth or reality

“…The ensuing recession continues to impact markets and the UK is no exception. As Oulton and Sebastia-Barriel (2013) point out, labour productivity has illustrated a puzzling behaviour following the onset of the 2008 recession. "Despite some modest improvements in 2013, whole-economy output per hour remains around 16% below the level implied by its pre-crisis trend" (Barnett et al, 2014).…”

“…The latter, damage to capacity is heavily argued in Reinhart and Rogoff (2009) which states the financial crisis has left long lasting effects on employment, output and asset prices with declining house prices and rising unemployment being a key feature. Favouring the latter, a paper by Oulton and Sebastia-Barriel (2013) argues that the financial crisis will have a long term effect on the British economy, justifying their hypothesis on studies of previous financial crises by Reinhart and Rogoff, also Barrell et al (2010) together with their own paper Long and Short-Term Effects of the Financial Crisis on Labour Productivity, Capital and Output (Oulton & Sebastia-Barriel, 2013). Clearly, considerable academic work has been conducted on the subject and this paper is not designed to match the depth of analysis and the academic rigour deployed.…”

“…However, this study does pose the question whether the financial crisis has brought to a head an underlying issue in the UK economy relating to the long run decline of output against the hours of work employed. It is inconceivable that, over the long term, UK companies have been operating with more labour than necessary and there is no evidence of a real lack of productive investment (Oulton & Sebastia-Barriel, 2013). It should be noted that output grew quickly post the 1991 recession whilst productivity hours and employment grew at a steadier pace.…”