Can job displacements explain the UK's productivity puzzle?

Presenter: Panagiotis Giannarakis, University of Southampton

Author: Panagiotis Giannarakis

Human capital has been found to be important for aggregate productivity, and large individual human capital losses are associated with job displacements. I investigate the role of involuntary job separations (since displacements have increased during the 2008 financial crisis) on the UK’s productivity puzzle. I construct an estimator of aggregate productivity (as output per hour worked) which accounts for displacements. I introduce a tractable Constant Elasticity of Substitution (CES) production function that separates workers into displaced and non-displaced, and is adjusted to real aggregate data. As a first step, I estimate that the elasticity of substitution between high and low educated workers for the UK economy is 1.97 (which is close to the estimations of Acemoglu for the US economy). With the adjusted CES, I run the following accounting counterfactual exercise: I measure the potential aggregate productivity for the hypothetical case where the productivity of a displaced worker is equal with the one that he had before the displacement. I establish a methodology which can also be used for a comparison between different economies.

By linking the British Household Panel Survey with the Understanding Society dataset, we extract a unique worker’s earning histories for the UK from 1990 to 2011, which includes the current economic crisis. I combine this new dataset with aggregate data from the Office for National Statistics (ONS) and I run counterfactual exercises where I observe the following results: displacements can explain on about the 22% of the drop in the growth rate of productivity, and the 10% of the post-crisis gap, if productivity had followed the path of past recessions.