## 1. Description of the Datasets ## Source details **Canonical URL:** [1. Description of the Datasets](https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025112.pdf) ## Other formats - [Markdown version](/-/media/files/publications/selected-issues-papers/2025/english/sipea2025112.pdf.md) - [Structured JSON version](/-/media/files/publications/selected-issues-papers/2025/english/sipea2025112.pdf.json) --- ### Overview and key findings - The UK’s productivity gap with the US has widened over the past two decades, with productivity growth rates decoupling after the Global Financial Crisis (GFC). - In the early 2000s, the UK experienced strong aggregate labor productivity growth, nearly matching the US's average annual rate of 2 percent. - After the GFC the UK achieved only half the productivity gains seen in the US since 2010. - Today, the UK’s aggregate labor productivity level is approximately 20 percent lower than in the US, while it was just about 10 percent lower in the early 2000s. - Low productivity growth has been the main driver of subdued medium-term growth prospects for the UK. ### Datasets used (Box 1) - Compustat - Coverage: publicly-listed firms in the US and the UK. - Time span: 2000 to 2023. - Firm-level labor productivity measure: real revenues per number of employees; revenues converted to a common currency using PPPs and deflated using one-digit sectoral deflators. - Limitations: - Only covers publicly-listed firms (on average larger than the typical firm). - Does not allow explicit observation of firm entry and exit (cannot directly address business dynamism). - Financial sector firms are excluded. - Aggregate productivity trends in Compustat align with national accounts patterns (see Annex I). - EU-KLEMS - Coverage: harmonized cross-country sectoral level data on employment, productivity and intangible capital constructed from national accounts. - Time span: 2000–21. - Sectoral labor productivity measure: real sectoral value added per total employment. - Advantage: covers all sectors of the economy. ### Definitions and measurement - Primary focus: labor productivity defined as output per worker (real output per worker). - Firm-level labor productivity: real revenues per employee (Compustat) or real value added per employment (EU-KLEMS at sector level). - Total factor productivity (TFP): residual capturing factors beyond labor and capital; discussed as an underlying driver of firms’ labor productivity but not the main focus. - Aggregate productivity decomposition: changes in labor supply, capital accumulation and TFP — prior work shows most of the UK slowdown attributable to a decline in TFP growth. ### Stylized quantitative context and periods - Pre-GFC period defined as 2000–2008. - Post-GFC period defined as 2010–2021. - Evidence from ONS (2023) cited in the paper: - Between 2000 and 2008 the UK experienced average labor productivity growth, measured as output per hour worked, of approximately 1.8 percent, close to the US's 2.1 percent growth rate. - After the financial crisis labor productivity growth slowed down in both countries, but while the US maintained a growth rate of around 1 percent, the UK's rate fell to 0.5 percent. - Aggregate labor productivity index baseline: 2000=100 (Figure 1). ### Microeconomic approach and analytical contributions - Cross-country, firm-based comparison between the UK and the US using Compustat (publicly-listed firms) and EU-KLEMS (sectoral). - Analytical aims: - Assess sectoral contributions to the UK-US productivity divergence. - Decompose whether US productivity gains stem from better allocation across firms (between-firm) or greater internal firm efficiency (within-firm). - Investigate drivers of within-firm TFP differences, emphasizing investment in intangible capital and R&D spending. - Key finding preview: - Loss of pre-GFC growth engines—particularly a leverage-driven boom in the financial sector—accounts for a large part of the UK slowdown relative to the US, but is not the whole story. - Outside finance, UK publicly listed firms, especially frontier firms, have lagged the US due to a significant decline in post-GFC TFP growth, widening within-firm efficiency gaps. - Reduced investment in intangible capital following the GFC and lower R&D spending compared to the US are plausible contributors to subdued TFP growth among UK firms. ### Sectoral patterns (summary of findings) - Sectoral decomposition uses EU-KLEMS to evaluate sectoral contributions to aggregate labor productivity growth. - Six sectors account for more than 60 percent of total employment: manufacturing, construction, retail (wholesale and retail trade), finance, food services, ICT; remaining sectors defined as “other sectors.” - Notable sectoral findings: - The UK’s financial sector contribution was high pre-GFC and then turned substantially negative post-GFC, contributing materially to the productivity decoupling from the US. - Wholesale and retail trade also contributed to the decoupling, driven by lower sectoral productivity growth (not by declining employment share). ### Micro-level mechanisms and channels (summary) - Prior macro and micro literature indicates: - Aggregate TFP decline is the major proximate cause of the UK slowdown. - Chronic underinvestment by firms (business investment as a share of GDP below many G-7 economies) is a commonly cited micro explanation. - Factors constraining investment and productivity include persistent shocks, SME financing difficulties, planning restrictions, and frequent policy changes increasing uncertainty. - Skills gaps and management weaknesses hamper adoption of new technologies and organizational improvements; skill mismatches in the UK are reported to be higher than the OECD average. - This paper’s micro evidence: - Between-firm reallocation explains less of the UK-US divergence than within-firm TFP differences. - Frontier firms in the UK have underperformed their US counterparts after the GFC. - Lower investment in intangible capital and reduced R&D spending in the UK after the GFC likely contributed to slower TFP growth. ### Manufacturing and sectoral contributions to productivity - The manufacturing sector’s contribution to productivity growth declined significantly after the GFC. - The US experienced a similar post-GFC decline in manufacturing contribution, implying common or related sectoral structural shifts across countries. - One force highlighted is intensifying competition from global manufacturers offering cheaper products, which crystallized after the GFC when the sector’s high labor costs could no longer be offset by greater investment in physical capital. ### ICT and financial sectors - ICT sector: - The ICT sector in the UK has shown sustained productivity growth over the past two decades but with signs of slowdown in recent years. - ICT’s spillover impact appears smaller in the UK than in the US, possibly reflecting weaker access to digital infrastructure (e.g., high-speed internet) and shortages of appropriate labor market skills that constrain small firms' adoption of new technologies. - Financial sector: - The UK’s financial sector shows idiosyncratic patterns that are important for the overall productivity picture (chapter separates financial sector from main firm-level analysis; Compustat does not cover financial firms). ### Resource misallocation versus within-firm efficiency - Aggregate productivity decomposed into: - Within-firm component (productivity of the average firm). - Between-firm component (resource allocation across firms; resource misallocation). - Olley-Pakes (1996) static decomposition results: - Between-firm factors contribute negatively to aggregate productivity in the US and explain a much smaller fraction in the UK. - Despite a larger negative between-firm contribution in the US, aggregate productivity in the US is higher due to stronger within-firm productivity growth. - Key numeric comparison: - US average within-firm productivity growth: 2.5 percent per year over the sample period. - UK average within-firm productivity growth: 0.9 percent per year over the sample period. - Conclusion: The widening productivity gap between the UK and the US (outside the financial sector) is largely due to a divergence in within-firm productivity growth rather than resource misallocation. ### Evidence on employment reallocation and misallocation indicators - Share of workers in the lowest productivity decile is higher in the UK than in the US. - Post-GFC, the US experienced stronger reallocation toward less productive firms, with a sharper decline in employment share of the most productive firms (top two deciles). - These stylized facts suggest misallocation is not the primary driver of the UK–US decoupling. ### Within-firm drivers: TFP and capital intensity - Framework: Within-firm labor productivity growth decomposed into TFP growth and capital intensity changes via firm-level production function estimation. - Post-GFC patterns: - Growth in capital per worker broadly flat in both countries after the GFC. - TFP patterns diverged: US firms’ annual TFP growth fell from approximately 2.5 percent to 1 percent; the decline was more pronounced for UK businesses and explains most of the divergence from the US. - Frontier firms: - Decline in firm-level TFP growth after the GFC has been particularly pronounced among UK frontier firms (frontier firms defined as those in the top decile of the labor productivity distribution). - UK frontier firms’ cumulative labor productivity growth post-GFC is below that of US frontier firms and even below US laggard firms. - Intangible investment: - Investment into intangible capital is increasingly important for innovation-led productivity growth. - Prior to the GFC, UK firms’ investment rate into intangible capital was approximately 4 percent, similar to the US. - Post-GFC: - US publicly-listed firms maintained an average investment rate of 3 percent in intangible assets. - UK publicly-listed firms’ investment rate fell to 1 percent. - By 2019, the UK's intangible capital stock level was lower than at the onset of the financial crisis. ### R&D spending and knowledge capital returns - Aggregate R&D spending as a share of GDP in the UK has lagged the US despite generous R&D tax incentives. - Publicly listed UK firms spend less on R&D as a share of sales compared to US firms; the gap is particularly notable in tech sectors. - Returns to knowledge capital are more dispersed in the UK than in the US, implying potential gains from reallocating knowledge capital toward higher-return firms. - Firm-level construction: returns to knowledge capital computed as the ratio of firm revenues to knowledge capital (knowledge capital constructed via perpetual inventory method on R&D spending). ### Possible determinants of lower R&D and intangible investment - Access to finance: - UK listed firms rely more on debt financing and less on equity compared to US counterparts. - Net equity issuance averaged approximately 10 percent of total assets in both countries in the four years preceding the GFC; the difference in equity issuance widened afterwards. - Lower reliance on equity financing may reduce UK firms’ capacity to undertake riskier, intangible-intensive projects like R&D. - Venture capital and scaling up: - The UK has the largest venture capital market in Europe but lags the US (and some other advanced economies) in size, particularly for later-stage funding needed to scale high-growth ICT firms. - Venture capital investment in the ICT sector measured as percent of GDP shows the UK trailing the US, Canada, and Denmark in 2023; UK VC more concentrated in seed/start-up stages with less later-stage funding. - Trade openness and Brexit: - Higher trade costs following Brexit may have reduced firms’ incentives to invest in R&D by limiting market size and increasing bureaucratic costs, lowering demand and technological adoption. - Brexit also complicated hiring and retaining global talent, affecting firms’ ability to secure high-skilled workers necessary for innovation. ### Policy-relevant implications highlighted in the chapter - The decoupling from the US is mainly driven by weaker within-firm TFP growth in the UK, especially among frontier firms, linked to lower intangible and R&D investment post-GFC. - Policies that could address these factors include: - Promoting reallocation of workers and financial capital toward more productive businesses to raise aggregate productivity. - Improving firms’ access to equity finance to better support riskier intangible investments. - Strengthening the scale-up ecosystem (later-stage venture capital) to allow high-growth firms, especially in ICT, to expand and justify higher R&D spending. - Reducing trade frictions and easing constraints on attracting global talent to restore incentives for firms to innovate and to adopt new technologies. ### Sectoral strengths and strategic recommendations (chapter highlights) - Finance - Loss of pre-GFC growth engines, such as the leverage-driven boom in the financial sector, explains a large part of the productivity slowdown relative to the US. - Reforms that streamline data collection and revise firms’ listing requirements could boost the sector’s efficiency; simplification of rules should preserve financial stability. - ICT and AI - The UK is well-positioned to capitalize on AI technologies; IMF's AI readiness index shows the UK surpasses the average of other advanced economies due to a large share of workers in cognitive-intensive jobs. - Policy actions: speed delivery of critical infrastructure (e.g., via construction planning reforms), improve skills, and expand tax credits or allowances for SME training to broaden adoption of digital technologies. - Boosting firm innovation (scale-up finance and talent) - Improve access to scale-up finance: - Incentivize institutional investor participation (e.g., pension funds) in domestic venture capital to support high-growth firms. - Authorities’ plans to consolidate pension funds are noted as potentially expanding access to diverse asset classes. - Retain talent and strengthen university–business collaboration: - Create innovation hubs and intensify university–business collaboration to support commercialization. - Prioritize measures that help retain talent and encourage labor mobility of high-skilled workers. ### Annex I — Productivity trends in Compustat data and national accounts (key statistics) - Table I.1 — Average Labor Productivity Growth and Aggregate Labor Productivity Growth (Compustat) - UK pre- GFC (2000-2008): Average Labor Productivity Growth 3.1% ; Aggregate Labor Productivity Growth 4.3% - UK post- GFC (2010-2021): Average Labor Productivity Growth -0.3% ; Aggregate Labor Productivity Growth -0.2% - US pre- GFC (2000-2008): Average Labor Productivity Growth 3.4% ; Aggregate Labor Productivity Growth 2.2% - US post- GFC (2010-2021): Average Labor Productivity Growth 1.1% ; Aggregate Labor Productivity Growth 0.9% - Table I.2 — Growth Rate Output per Worker and Growth Rate Output per Hour Worked (national accounts, ONS 2023) - UK pre- GFC (2000-2008): Growth Rate Output per Worker 1.3% ; Growth Rate Output per Hour Worked 1.7% - UK post- GFC (2010-2021): Growth Rate Output per Worker 0.5% ; Growth Rate Output per Hour Worked 0.5% - US pre- GFC (2000-2008): Growth Rate Output per Worker 1.5% ; Growth Rate Output per Hour Worked 2.1% - US post- GFC (2010-2021): Growth Rate Output per Worker 1.4% ; Growth Rate Output per Hour Worked 1% - Notes: Output in each country is measured as real GDP, chained volume measure. For comparisons of levels ONS (2023) use current price GDP converted using PPPs; for growth rates GDP at constant prices in national currencies is utilized. ### Appendix I — Methodology highlights (mathematical) - Sectoral decomposition: - Aggregate labor productivity growth in year t approximated by: G_prod_d_t ≈ Σ_{i=1}^N y_{i,t-1} * g_prod_d_{i,t}, where y_{i,t-1} is the nominal value-added share of sector i in year t−1 and g_prod_d_{i,t} is the labor productivity growth rate of sector i in year t. Nominal value added shares are computed as shares of total value-added of the non-agricultural market economy. Sectors are at the NACE 1-digit aggregation level. - Olley-Pakes decomposition: - Aggregate productivity P_t = Σ_{i=1}^N p_{i,t} s_{i,t} = p̄_t + Σ_{i=1}^N (p_{i,t} − p̄_t)(s_{i,t} − s̄_t). First term captures within-firm productivity; second term is the covariance between firm productivity and employment share (between-firm component). - Production function and TFP estimation: - Cobb-Douglas in logs: y_{it} = α + β_l l_{it} + β_k k_{it} + ω_{it} + e_{it}. - Estimation uses a non-parametric approach used by IMF (2024b) and developed by Gandhi and others (2020) to address ω_{it} correlation with inputs. - Decomposition of labor productivity growth into capital intensity and TFP growth: - Δprod_{it} = (β_l − 1) Δl_{it} + β_k Δk_{it} + Δu_{it}, with u_{it} = ω_{it} + e_{it}. - Averaging and using constant returns to scale β_k = 1 − β_l yields: Δprod_t = (1 − β_l)(Δk_t − Δl_t) + Δω_t. First term is growth in capital intensity; second term is growth in TFP. *Source: sipea2025112 — IMF staff calculations using Compustat, EU-KLEMS and OECD data as presented in sipea2025112 (selected excerpts).* ### 1. Description of the Datasets __________________________________________________________ 5 ### 1. Description of the Datasets ### Overview and key findings - The UK’s productivity gap with the US has widened over the past two decades, with productivity growth rates decoupling after the Global Financial Crisis (GFC). - In the early 2000s, the UK experienced strong aggregate labor productivity growth, nearly matching the US's average annual rate of 2 percent. - After the GFC the UK achieved only half the productivity gains seen in the US since 2010. - Today, the UK’s aggregate labor productivity level is approximately 20 percent lower than in the US, while it was just about 10 percent lower in the early 2000s. - Low productivity growth has been the main driver of subdued medium-term growth prospects for the UK. ### Datasets used (Box 1) - Compustat - Coverage: publicly-listed firms in the US and the UK. - Time span: 2000 to 2023. - Compustat contains detailed balance sheet information and is compiled by Standard & Poor’s. - Firm-level labor productivity measure: real revenues per number of employees; revenues converted to a common currency using PPPs and deflated using one-digit sectoral deflators. - Limitations: - Only covers publicly-listed firms (on average larger than the typical firm). - Does not allow explicit observation of firm entry and exit (cannot directly address business dynamism). - Financial sector firms are excluded given challenges with estimating TFP for these firms. - Aggregate productivity trends in Compustat align with national accounts patterns (see Annex I). - EU-KLEMS - Coverage: harmonized cross-country sectoral level data on employment, productivity and intangible capital constructed from national accounts. - Time span: 2000–21. - Sectoral labor productivity measure: real sectoral value added per total employment. - Advantage: covers all sectors of the economy. ### Definitions and measurement - Primary focus: labor productivity defined as output per worker (real output per worker). - Firm-level labor productivity: real revenues per employee (Compustat) or real value added per employment (EU-KLEMS at sector level). - Total factor productivity (TFP): residual capturing factors beyond labor and capital; discussed as an underlying driver of firms’ labor productivity but not the main focus. - Aggregate productivity decomposition: changes in labor supply, capital accumulation and TFP — prior work shows most of the UK slowdown attributable to a decline in TFP growth. ### Stylized quantitative context and periods - Pre-GFC period defined as 2000–2008. - Post-GFC period defined as 2010–2021. - Evidence from ONS (2023) cited in the paper: - Between 2000 and 2008 the UK experienced average labor productivity growth, measured as output per hour worked, of approximately 1.8 percent, close to the US's 2.1 percent growth rate. - After the financial crisis labor productivity growth slowed down in both countries, but while the US maintained a growth rate of around 1 percent, the UK's rate fell to 0.5 percent. - Aggregate labor productivity index baseline: 2000=100 (Figure 1). ### Microeconomic approach and analytical contributions - Cross-country, firm-based comparison between the UK and the US using Compustat (publicly-listed firms) and EU-KLEMS (sectoral). - Analytical aims: - Assess sectoral contributions to the UK-US productivity divergence. - Decompose whether US productivity gains stem from better allocation across firms (between-firm) or greater internal firm efficiency (within-firm). - Investigate drivers of within-firm TFP differences, emphasizing investment in intangible capital and R&D spending. - Key finding preview: - Loss of pre-GFC growth engines—particularly a leverage-driven boom in the financial sector—accounts for a large part of the UK slowdown relative to the US, but is not the whole story. - Outside finance, UK publicly listed firms, especially frontier firms, have lagged the US due to a significant decline in post-GFC TFP growth, widening within-firm efficiency gaps. - Reduced investment in intangible capital following the GFC and lower R&D spending compared to the US are plausible contributors to subdued TFP growth among UK firms. ### Sectoral patterns (summary of findings) - Sectoral decomposition uses EU-KLEMS to evaluate sectoral contributions to aggregate labor productivity growth. - Sectors highlighted: manufacturing, construction, retail (wholesale and retail trade), finance, food services, ICT (these six account for more than 60 percent of total employment); remaining sectors defined as “other sectors.” - Notable sectoral findings: - The UK’s financial sector contribution was high pre-GFC and then turned substantially negative post-GFC, contributing materially to the productivity decoupling from the US. - Wholesale and retail trade also contributed to the decoupling, driven by lower sectoral productivity growth (not by declining employment share). ### Micro-level mechanisms and channels (summary) - Prior macro and micro literature indicates: - Aggregate TFP decline is the major proximate cause of the UK slowdown. - Chronic underinvestment by firms (business investment as a share of GDP below many G-7 economies) is a commonly cited micro explanation. - Factors constraining investment and productivity include persistent shocks, SME financing difficulties, planning restrictions, and frequent policy changes increasing uncertainty. - Skills gaps and management weaknesses hamper adoption of new technologies and organizational improvements; skill mismatches in the UK are reported to be higher than the OECD average. - This paper’s micro evidence: - Between-firm reallocation explains less of the UK-US divergence than within-firm TFP differences. - Frontier firms in the UK have underperformed their US counterparts after the GFC. - Lower investment in intangible capital and reduced R&D spending in the UK after the GFC likely contributed to slower TFP growth. ### Policy implications highlighted - Two-pronged approach suggested to revive UK productivity: - Build on the UK’s strengths and revitalize traditional growth engines, especially the financial and ICT sectors. - Foster a more conducive environment for business innovation via: - Greater access to scale-up finance. - Continued efforts to retain high skilled individuals. *Source: sipea2025112 - 1. Description of the Datasets (selected excerpts).* ### 13. The decline of the UK manufacturing sector explains the productivity slowdown over ### 13. The decline of the UK manufacturing sector explains the productivity slowdown over time, but not the decoupling from the US ### Manufacturing and sectoral contributions to productivity - The manufacturing sector’s contribution to productivity growth declined significantly after the GFC (Global Financial Crisis). - The US experienced a similar post-GFC decline in manufacturing contribution, implying common or related sectoral structural shifts across countries. - One force highlighted is intensifying competition from global manufacturers offering cheaper products, which crystallized after the GFC when the sector’s high labor costs could no longer be offset by greater investment in physical capital. ### ICT and financial sectors - ICT sector: - The ICT sector in the UK has shown sustained productivity growth over the past two decades but with signs of slowdown in recent years. - ICT’s spillover impact appears smaller in the UK than in the US, possibly reflecting weaker access to digital infrastructure (e.g., high-speed internet) and shortages of appropriate labor market skills that constrain small firms' adoption of new technologies. - Financial sector: - The UK’s financial sector shows idiosyncratic patterns that are important for the overall productivity picture (chapter separates financial sector from main firm-level analysis; Compustat does not cover financial firms). ### Resource misallocation versus within-firm efficiency - Aggregate productivity decomposed into: - Within-firm component (productivity of the average firm). - Between-firm component (resource allocation across firms; resource misallocation). - Olley-Pakes (1996) static decomposition results: - Between-firm factors contribute negatively to aggregate productivity in the US and explain a much smaller fraction in the UK. - Despite a larger negative between-firm contribution in the US, aggregate productivity in the US is higher due to stronger within-firm productivity growth. - Key numeric comparison: - US average within-firm productivity growth: 2.5 percent per year over the sample period. - UK average within-firm productivity growth: 0.9 percent per year over the sample period. - Conclusion: The widening productivity gap between the UK and the US (outside the financial sector) is largely due to a divergence in within-firm productivity growth rather than resource misallocation. ### Evidence on employment reallocation and misallocation indicators - Share of workers in the lowest productivity decile is higher in the UK than in the US. - However, post-GFC dynamics show the US experienced stronger reallocation toward less productive firms, with a sharper decline in employment share of the most productive firms (top two deciles). - These stylized facts suggest misallocation is not the primary driver of the UK–US decoupling. ### Within-firm drivers: TFP and capital intensity - Framework: Within-firm labor productivity growth decomposed into TFP growth and capital intensity changes via firm-level production function estimation. - Post-GFC patterns: - Growth in capital per worker broadly flat in both countries after the GFC. - TFP patterns diverged: US firms’ annual TFP growth fell from approximately 2.5 percent to 1 percent; the decline was more pronounced for UK businesses and explains most of the divergence from the US. - Frontier firms: - The decline in firm-level TFP growth after the GFC has been particularly pronounced among UK frontier firms (frontier firms defined as those in the top decile of the labor productivity distribution). - UK frontier firms’ cumulative labor productivity growth post-GFC is below that of US frontier firms and even below US laggard firms. - Intangible investment: - Investment into intangible capital is increasingly important for innovation-led productivity growth. - Prior to the GFC, UK firms’ investment rate into intangible capital was approximately 4 percent, similar to the US. - Post-GFC: - US publicly-listed firms maintained an average investment rate of 3 percent in intangible assets. - UK publicly-listed firms’ investment rate fell to 1 percent. - By 2019, the UK's intangible capital stock level was lower than at the onset of the financial crisis. ### R&D spending and knowledge capital returns - Aggregate R&D spending as a share of GDP in the UK has lagged the US despite generous R&D tax incentives. - Publicly listed UK firms spend less on R&D as a share of sales compared to US firms; the gap is particularly notable in tech sectors. - Returns to knowledge capital are more dispersed in the UK than in the US, implying potential gains from reallocating knowledge capital toward higher-return firms. - Firm-level construction: returns to knowledge capital computed as the ratio of firm revenues to knowledge capital (knowledge capital constructed via perpetual inventory method on R&D spending). ### Possible determinants of lower R&D and intangible investment - Access to finance: - UK listed firms rely more on debt financing and less on equity compared to US counterparts. - Net equity issuance averaged approximately 10 percent of total assets in both countries in the four years preceding the GFC; the difference in equity issuance widened afterwards. - Lower reliance on equity financing may reduce UK firms’ capacity to undertake riskier, intangible-intensive projects like R&D. - Venture capital and scaling up: - The UK has the largest venture capital market in Europe but lags the US (and some other advanced economies) in size, particularly for later-stage funding needed to scale high-growth ICT firms. - Venture capital investment in the ICT sector measured as percent of GDP shows the UK trailing the US, Canada, and Denmark in 2023; UK VC more concentrated in seed/start-up stages with less later-stage funding. - Trade openness and Brexit: - Higher trade costs following Brexit may have reduced firms’ incentives to invest in R&D by limiting market size and increasing bureaucratic costs, lowering demand and technological adoption. - Brexit also complicated hiring and retaining global talent, affecting firms’ ability to secure high-skilled workers necessary for innovation. ### Policy-relevant implications highlighted in the chapter - The decoupling from the US is mainly driven by weaker within-firm TFP growth in the UK, especially among frontier firms, linked to lower intangible and R&D investment post-GFC. - Policies that could address these factors (as discussed in the chapter) include: - Promoting reallocation of workers and financial capital toward more productive businesses to raise aggregate productivity. - Improving firms’ access to equity finance to better support riskier intangible investments. - Strengthening the scale-up ecosystem (later-stage venture capital) to allow high-growth firms, especially in ICT, to expand and justify higher R&D spending. - Reducing trade frictions and easing constraints on attracting global talent to restore incentives for firms to innovate and to adopt new technologies. *Source: IMF staff calculations using Compustat, EU-KLEMS and OECD data as presented in sipea2025112 (chapter text).* ### 26. One pillar of a strategy to boost productivity growth could build on the UK’s ### 26. One pillar of a strategy to boost productivity growth could build on the UK’s ### Sectoral strengths: Finance - Key assessment: - Loss of pre-GFC growth engines, such as the leverage-driven boom in the financial sector, explains a large part of the productivity slowdown relative to the US. - Although it is unlikely that the financial sector will again make the same contribution to productivity growth as it did pre-GFC, as this would require unsustainable increases in leverage, there is still potential to bolster its role in driving economic growth. - Policy measures and recommendations: - Authorities have initiated important measures to enhance the financial sector's contribution to growth (as outlined in the Article IV report). - Reforms aimed at streamlining data collection and revising firms’ listing requirements have the potential to boost the sector’s efficiency. - Simplification of existing regulatory rules should be conducted cautiously to preserve financial stability. ### Sectoral strengths: ICT and AI - Key assessment: - The UK has the potential to exploit the latest technological advancements in the ICT sector, including AI. - The IMF's AI readiness index shows that the UK is well-positioned to capitalize on AI technologies, with the index score surpassing the average of other advanced economies because of the large share of workers employed in cognitive-intensive jobs (Cazzaniga and others 2024). - Policy measures and recommendations: - Authorities’ reforms in the area of construction planning are expected to speed up the delivery of critical infrastructure needed for AI development. - Improving skills could allow more widespread adoption of digital technologies, so that productivity gains from the latest technological developments, including AI, are not concentrated in too few firms. - Expanding tax credits or tax allowances for SMEs that invest in employees’ training can facilitate upskilling the workforce and narrowing existing skill gaps. ### The road ahead: Boosting firm innovation (scale-up finance and talent) - Comparative finding: - Compared to the US, the UK's leading frontier firms have experienced slower TFP growth since the GFC. - Policies to stimulate TFP growth: - Improve access to scale-up finance: - Start-ups and young businesses benefit from the UK’s vibrant venture capital market, but scaling up operations can be more challenging in the UK compared to the US. - Policies that incentivize participation of institutional investors, like pension funds, in domestic venture capital markets can help high-growth-potential firms expand within the country. - Authorities’ plans to consolidate pension funds are welcome as they have the potential to expand access to diverse asset classes. - Retain talent and strengthen university–business collaboration: - Ongoing efforts to create innovation hubs and intensify collaboration between universities and businesses support commercialization of new ideas. - Hiring workers with high levels of human capital and advanced skills is an important component of R&D investment. - The UK has a strong record of attracting high-skilled individuals, but talent retention has become harder. - Measures that help retain talent and encourage labor mobility of high-skilled workers should be prioritized to provide the right incentives for researchers and highly educated individuals to come and stay in the UK. ### Annex I — Productivity trends in Compustat data and national accounts - High-level alignment: - Productivity patterns of UK and US listed firms qualitatively align with national accounts data, though Compustat covers only publicly-listed firms and is not representative of the average firm. - The decline in labor productivity growth among UK firms after 2008 was stronger than the decline experienced by similar firms in the US. - Table I.1 — Average Labor Productivity Growth and Aggregate Labor Productivity Growth (Compustat) - UK pre- GFC (2000-2008): Average Labor Productivity Growth 3.1% ; Aggregate Labor Productivity Growth 4.3% - UK post- GFC (2010-2021): Average Labor Productivity Growth -0.3% ; Aggregate Labor Productivity Growth -0.2% - US pre- GFC (2000-2008): Average Labor Productivity Growth 3.4% ; Aggregate Labor Productivity Growth 2.2% - US post- GFC (2010-2021): Average Labor Productivity Growth 1.1% ; Aggregate Labor Productivity Growth 0.9% - National accounts measures (ONS 2023): - Table I.2 — Growth Rate Output per Worker and Growth Rate Output per Hour Worked - UK pre- GFC (2000-2008): Growth Rate Output per Worker 1.3% ; Growth Rate Output per Hour Worked 1.7% - UK post- GFC (2010-2021): Growth Rate Output per Worker 0.5% ; Growth Rate Output per Hour Worked 0.5% - US pre- GFC (2000-2008): Growth Rate Output per Worker 1.5% ; Growth Rate Output per Hour Worked 2.1% - US post- GFC (2010-2021): Growth Rate Output per Worker 1.4% ; Growth Rate Output per Hour Worked 1% - Notes: Output in each country is measured as real GDP, chained volume measure. For comparisons of levels ONS (2023) use current price GDP converted using PPPs; for growth rates GDP at constant prices in national currencies is utilized. ### Appendix I — Mathematical appendix (methodology highlights) - Decomposition of aggregate productivity growth in sectoral contributions: - Aggregate labor productivity growth in year t approximated by: G_prod_d_t ≈ Σ_{i=1}^N y_{i,t-1} * g_prod_d_{i,t}, where y_{i,t-1} is the nominal value-added share of sector i in year t−1 and g_prod_d_{i,t} is the labor productivity growth rate of sector i in year t. Nominal value added shares are computed as shares of total value-added of the non-agricultural market economy. Sectors are at the NACE 1-digit aggregation level. - Olley-Pakes decomposition framework: - Aggregate productivity P_t = Σ_{i=1}^N p_{i,t} s_{i,t} = p̄_t + Σ_{i=1}^N (p_{i,t} − p̄_t)(s_{i,t} − s̄_t). Where p_{i,t} is firm i labor productivity, s_{i,t} is employment share, and p̄_t, s̄_t are averages. First term captures within-firm productivity; second term is the covariance between firm productivity and employment share (between-firm component). - Production function and TFP estimation at the firm level: - Cobb-Douglas specification in logs: y_{it} = α + β_l l_{it} + β_k k_{it} + ω_{it} + e_{it}, where e_{it} is i.i.d. idiosyncratic shock and ω_{it} is unobserved firm-level TFP. - Estimation challenge: ω_{it} correlated with inputs l_{it} and k_{it}; OLS yields biased β estimates. - Method: Use a non-parametric approach used by IMF (2024b) and developed by Gandhi and others (2020). - Decomposition of labor productivity growth into capital intensity and TFP growth: - Productivity growth approximation: Δprod_{it} = (β_l − 1) Δl_{it} + β_k Δk_{it} + Δu_{it}, where u_{it} = ω_{it} + e_{it}. - Averaging across firms and using constant returns to scale β_k = 1 − β_l gives within-firm productivity growth decomposition: Δprod_t = (1 − β_l)(Δk_t − Δl_t) + Δω_t. First term captures growth rate in capital intensity; second term is growth rate in TFP. *International Monetary Fund — Selected Issues Paper content unit sipea2025112* --- _Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025112.pdf_