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The Financial Foundations of the Productivity Puzzle

Author

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  • Chadha, Jagjit S.
  • Kara, Amit
  • Labonne, Paul

Abstract

The financial crisis has led to a change in the mix of capital and labour employed in the UK and a sharp decline in total factor productivity. This has meant that labour productivity has not recovered to any great degree since the financial crisis. We explore the role of overall and sectoral productivity in explaining the fall in labour productivity, but also question the extent to which productivity in the service sector may be measured with error. We outline the links between a constrained financial sector and a fall in overall productivity – in which intangible capital seems to play an important role – and illustrate how a financial sector providing intermediate services may act to amplify the business cycle impetus from a total factor productivity shock within the context of a calibrated model.

Suggested Citation

  • Chadha, Jagjit S. & Kara, Amit & Labonne, Paul, 2017. "The Financial Foundations of the Productivity Puzzle," National Institute Economic Review, National Institute of Economic and Social Research, vol. 241, pages 48-57, August.
    • Handle: RePEc:cup:nierev:v:241:y:2017:i::p:r48-r57_13
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    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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