Allocative efficiency of UK firms during the great recession

This research documents that the fall and persistently low level of UK Total Factor Productivity (TFP) following the Great Recession was not caused by static resource misallocation between incumbent firms within industries. To arrive at this conclusion, we empirically measure misallocation using the Hsieh and Klenow methodology, developed in 2009, in conjunction with the FAME micro-level dataset that contains more than 9 million firms within the UK over the 2006–2014 period. The main findings are that, first, service sector TFP drops far more than manufacturing TFP and therefore drives the fall and long-lasting depression in aggregate productivity. Second, within-industry misallocation cannot account for the drop in TFP. And third, preliminary evidence suggests that entry and exit dynamics of firms might play a key role in allocating resources from productivity rich towards productivity poor firms.