The UK Productivity and Jobs Puzzle: Does the Answer Lie in Wage Flexibility?

UK GDP per worker fell by almost 4% in the five years following Lehman's collapse in 2008, something unprecedented in post‐war history. A possible reason for poor productivity is low growth in the effective capital–labour ratio. This is likely to have occurred because there has been a fall in real wages and increases in the cost of capital due to the financial crisis. We simulate various changes in the capital–labour ratio and after accounting for these changes, the evolution of total factor productivity appears much more similar to earlier severe recessions and likely to be related to underutilised resources.