It is certainly true that financial sector productivity was probably over-stated in the run-up to the crisis. 44  Nonetheless, the subsequent sharp fall in  financial services productivity is plainly not the whole story. Of the 1.7 percentage point fall in the UK’s productivity growth since 2008, less than a third can be accounted for by financial services (Table 2). One sectoral story that could account for this generalised slowing is a reduced rate of factor reallocation between sectors. 45  Consistent with that hypothesis, the dispersion of productivity across industries has  increased significantly over the last 40 years. And the variance in sectoral productivity gaps, relative to pre-crisis trends, also increased sharply after the crisis (Chart 14). Nonetheless, this pickup in the dispersion of productivity across sectors is dwarfed by the increase in productivity dispersion within sectors (Chart 15). This suggests that any obstacles to the movement of resources within the economy have been more important within sectors than across them. With that in mind, it is firm-by-firm data to which we now turn. Firm-level productivity trends  A more granular lens still comes from looking at firm-by-firm productivity data. The OECD has recently undertaken extensive analysis using company-level data to assess global productivity patterns. 46  We draw  on two datasets for the UK that can prospectively shed light on firm-level trends. 43 44 45  See Billet and Schneider (2016) for an interactive tool for examining sectoral productivity trends. Haldane et al (2010).
At this point, it is customary to wheel out the following, now rather over-used, Paul Krugman quote: “productivity isn’t everything, but in the long run it is almost everything.” Despite its over-use, this quote does have one important virtue, something not to be taken lightly in this post-fact, post-truth world: it is empirically verifiable and appears to be factually accurate. Let me illustrate that with a simple example. Since 1850 UK living standards, as measured by GDP per head, have risen roughly 20-fold, a huge gain. How much of that gain can be attributed to higher productivity? Well, if productivity had flat-lined over the period, UK living standards would only have only doubled. Or, put differently, in the absence of productivity growth, UK living standards would be an order of magnitude lower today, stuck at late-Victorian levels. A more refined way of reaching the same conclusion is to decompose growth into the contribution from inputs into the production process – labour and capital – and the contribution from improvements in the efficiency with which these inputs are used – so-called Total Factor Productivity (TFP). Chart 1 does that for the UK since the Industrial Revolution. This suggests movements in TFP have accounted for the lion’s share th  of both the growth and variation in living standards since at least the mid-18 century. Saying that productivity matters is not the same as saying we understand its determinants. The past few years have served to underscore just how partial economists’ understanding of productivity remains.