Recent trends in firm-level total factor productivity in the UK: new measures, new puzzles

Abstract

Understanding the poor productivity performance of the UK economy since the financial crisis is complicated by the well-known challenges in estimating total factor productivity (TFP) using only revenue data. We develop a structural framework to infer quality-adjusted TFP from an estimated firm-level revenue function. We use microdata for two sectors previously identified as being significant contributors to the UK's productivity growth slowdown—manufacturing and ICT—from 2008 to 2019. The revenue function is estimated using the Blundell–Bond System GMM estimator. We also use an alternative cost-shares approach to identifying and measuring TFP. For both methods, we find an overall fall in TFP levels in manufacturing and a rise in ICT. We find a striking decline of between 13% and 18% in the level of within-firm manufacturing TFP, and of between 11% and 16% in ICT, although with reallocation effects differing between the two sectors. The finding of declining within-firm TFP is robust, although the magnitude varies between methods. We discuss a possible explanation for this extended UK productivity puzzle based on the relative underperformance of UK firms in international markets.