Tracing productivity growth channels in the UK

Abstract

What drove the UK productivity slowdown post-Global Financial Crisis, and how is the post-Covid recovery expected to differ? This paper traces the sources of TFP growth in the UK over the last two decades through the lens of a structural model of innovation, using registry data on the universe of firms. The dominant innovation source in the pre-GFC decade were improvements by incumbent firms on their own products, whereas creation of new varieties by entrants took a leading role post-GFC. In the Covid recovery, survey data (as of July 2021) suggested that creative destruction (i.e., innovation replacing other firms' products) was expected to gain importance. Innovation remains key for the UK economy to secure sustainable productivity growth. Once the recovery is underway, growth policies should prioritize labor and capital reallocation across firms, in addition to R&D support and human capital investment.