Allocative Efficiency of UK Firms During the Great Recession

Research by: Florian Gerth, Martin O’Brien & Chad M. Briggs

Executive Summary

In academic and policy circles, the “Productivity Puzzle” of the UK, where the fall in aggregate productivity has been the driver for muted and slow economic growth, leading to an increase in unemployment and economic hardship, has been a widely discussed topic for the last 15 years.

This paper sheds light on this issue. It empirically shows 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.

Key takeaways:

1. Following the Great Recession, the fall of aggregate total factor productivity in the UK was driven by a fall in productivity within the service sector.
2. Contrary to popular belief, this was not driven by resource misallocation from incumbent firms. Meaning, capital and labour reallocation from high-productivity to low-productivity surviving firms.
3. Empirical evidence suggests, albeit preliminary, that frictions in entering and exiting the economy lead high-productivity firms to exit, while low-productivity firms survive.

This paper brings us one step closer to figuring out perverse productivity dynamics in the wake of global financial turmoil.

To cite this article: Gerth, F., O’Brien, M., & Briggs, C. M. (2025). Allocative efficiency of UK firms during the Great Recession. Applied Economics Letters, 1–6. https://doi.org/10.1080/13504851.2024.2449553

To access this article: https://doi.org/10.1080/13504851.2024.2449553

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Applied Economics Letters is a companion journal to Applied Economics, focusing on original research articles and discussions of previously published papers. Articles are reviewed by the Editor, Editorial Board members, or other experts. While primarily applied, submissions may also address methodology and theory. The journal accepts original articles.

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