A Comment on Oulton, "The UK Productivity Puzzle: Does Arthur Lewis Hold the Key?"

In Version One of his new paper, Oulton merges supply-side and demand-side theoretical models as a means better to understand why, since the financial crisis that broke in 2007, the UK’s productivity growth has not only been negligible but also a very poor outlier judged by international experience. Drawing on Arthur Lewis’s famous model of development, Oulton concludes, "rapid rates of immigration in conjunction with low rates of growth of export demand in the aftermath of the Great Recession can explain the UK productivity puzzle". According to Oulton, the UK's relatively poor productivity performance is attributable to a combination of the export demand constraint and of the continued growth of labour supply, which led to capital shallowing - a reduction in the rate of growth of capital services per hour worked. Bill Martin concludes, alas, that Arthur Lewis does not hold the key. The dominant, proximate "explanation" of the UK's relatively poor performance is relatively weak Total Factor Productivity (TFP), not relatively weak capital intensity. Moreover, the UK was not relatively more exposed to export demand shocks but delivered relatively worse output growth outcomes. Oulton nevertheless articulates the profound idea that full-employment capacity has adjusted to weak effective demand arising from adverse global developments. If this deep insight is correct, TFP would be a "measure of our ignorance" of the mechanisms that drove productive capacity to align with low aggregate demand.