Bank of England ‘puzzled’ by productivity gap
The Bank of England says productivity is 16% below its pre-crisis trend – but says it is at a loss to understand why.
Its latest quarterly bulletin says that since the onset of the 2007-08 financial crisis, labour productivity in the UK has been exceptionally weak.
It records some “modest” improvements in 2013.
However, it says even taking into account possible measurement issues, this shortfall is large and is often called the “productivity puzzle”.
Measures of productivity can be used to inform estimates of an economy’s ability to grow without generating too much inflation.
The productivity shortfall suggests inflation will not present a major threat as production rises, and therefore does not, in itself, present a pressing need to raise interest rates.
Shortfall
The Bank says a key challenge has been to understand better how much of the weakness in productivity has been due to weak demand compared with problems generated by the financial crisis.
It says one reason for the fall is that during the initial phases of the recession, companies appear to have kept on workers, despite a fall in demand.
But there remains a large degree of uncertainty around any interpretation of the weakness in productivity.
Source: BBC
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