MISALLOCATED capital, tied up in zombie firms, rather than funding new projects, is reducing the UK’s productivity, according to a prominent think-tank.
Capital has not been able to move from low-productivity to high-productivity projects, the Institute for Fiscal Studies (IFS) said this morning, slowing down the speed of the capital adjustment required to ramp up productivity.
And business investment has stayed 16 per cent below the pre-recession peak, the IFS pointed out, due to uncertainty over future economic conditions, and a substitution towards relatively cheap, and more quickly adaptable labour.
“The fall in labour productivity seems to have been driven by low real wages and low firm investment,” said IFS research economist Wenchao Jin.
Important in this movement is the UK’s flexible labour market, the IFS says, which has allowed real wages to fall, and prevented economic inactivity rising as in recessions in the 1970s and 1980s.
By contrast, labour hoarding cannot explain the productivity puzzle, the think-tank said, as employment is on its way up, rather than simply falling very slowly, and has snapped back from an initial fall.
The decline in financial services jobs – typically highly productive – is another explanation that does not cut the mustard, the authors say, since all industries have seen effectiveness decline. “Productivity slowdown has happened right across the economy,” Jin commented. “It has not been driven by a change in the composition of the economy nor by a change in the composition of the workforce.”