Sectoral productivity estimates

Understanding the productivity puzzle is an important objective of government and policymakers. There are many explanations for the slowdown in productivity growth in advanced economies in recent decades. One hypothesis is that measurement issues have exaggerated the extent of the slowdown. This is not a criticism of standard practice but reflects the idea that economic activity has increased in relative importance in areas that are poorly measured.

We revisited the sector-level productivity estimates in this context and in the light of measurement advances.

As part of this project, we measured activity in services sectors – a sector with significant measurement challenges. The sector includes industries such as hospitality, transport and financial services.

We analysed the effect of double deflation on output and productivity at the industry and whole economy levels. We used publicly available price indices (deflators) at the level roughly of the Supply and Use Tables to estimate double-deflated real value added for seventy-nine industries over the period 1997-2015.

We aggregated our double-deflated industry-level real value-added estimates using the same methodology and data as the ONS to give an alternative estimate of real GDP from the output side.

Measuring activity in services sectors

We compiled a comprehensive audit of methodologies and data sources and compared growth in Services Producer Prices Indices (SPPIs) in the UK to fifteen competitor countries.

• In considering education services, we explored two avenues for improvement to current practice: first, quality adjustments applied to volume measures of school enrolments; second, output measures based on labour market earnings outcomes and embedded into a national accounting framework.
• Our work on insurance services explored measures of insurance output based on the increase in welfare generated by insurance, and alternatively, on risk carried.
• We compared the sensitivity of the UK methodology for calculating financial intermediation services indirectly measured (FISIM) to alternative choices of reference rate and discussed some of the other important methodological issues with FISIM. FISIM is a primary source of output produced by financial intermediaries.

We found that the growth rate of industry-level real value added was substantially lower on average under double deflation than under single deflation, and the year-to-year volatility of growth rates was much higher under double deflation. With these estimates, GDP would have grown substantially more slowly than the official estimate for 1997- 2015. Our theoretical work on double deflation showed that it is possible to implement double deflation in a way that has no effect on the headline growth rate of GDP.

Services sectors

Our audit of Services Producer Prices Indices concluded that errors in measuring services prices are unlikely to explain the observed poor UK performance in productivity growth relative to other major economies in the past decade. However, the results did not preclude that some services prices are badly measured everywhere, which might contribute to an explanation of the global productivity slowdown experienced by many countries. Our work highlighted large differences in prices for some services between business-to-business and business-to-consumer transactions.

Our work on education suggested that the use of standardised test scores may not capture key aspects of underlying skills that should be incorporated in quality adjustments. This points to the need to consider the entire education sector, rather than separating schools from further education. Our research also suggested that nominal and real output measures based on increments to lifetime earnings that can be attributed to formal education are a useful alternative method to current practice. These measures could be incorporated into the National Accounts in a consistent way by treating education as investment in social infrastructure.

We examined several alternatives to the way the Bank of England currently calculates the FISIM reference rate, proposing a method to potentially better capture MFIs’ cost of funding.

This project challenged the methods and delivery of double-deflated estimates of National Accounts, contributing to ONS’s decision to delay full implementation of double deflation in Blue Book 2019. The project was influential in helping ONS to understand the variety of options available and methodological challenges as they arose. We also provided input and challenge to ONS work to estimate the intermediate expenditure proportions that feed into the Supply and Use Tables and GDP estimates, following the reintroduction of the Annual Purchases Survey in 2015. Our analysis of the UK productivity puzzle influenced policy debate and the way that ONS presents the real estate sector in industry analyses of productivity.

Our research into the impact of different methods used to derive Services Producer Prices Indices shows clear biases between different approaches. This key evidence was submitted by the UK to the UN’s Voorburg Group on services statistics. Our work on insurance and financial services provided a foundation for ONS to launch their reviews of these sectors as part of Blue Book 2021, and beyond. Our work on education is influencing ongoing work at ONS around the measurement of human capital and education output more widely.

O’Mahony, M., & Samek, L. “Measuring the volume of services industries output: An audit of services producer price indices” ESCoE Discussion Paper Series, March 2021.

O’Mahony, M. and Samek, L. “Incorporating health status into human capital stocks: An analysis for the UK” ESCoE Discussion Paper Series, March 2021.

O’Mahony, M. and Samek, L. (2021) “Measuring the volume of services industries output and productivity: An audit of services producer price indices in OECD countries” International Productivity Monitor, 2021, Vol 40, 89-104.

O’Mahony, M. and Samek, L. (2021) “Measuring the volume of services industries output: An audit of services producer price indices” ESCoE Technical Report Series, ESCoE TR-10.

Corrado, C., O’Mahony, M. and Samek, L. (2020) “Measuring education services using lifetime incomes” ESCoE Discussion Paper Series, ESCoE DP 2020-02.

Oulton, N., “Measuring productivity: Theory and British practice” ESCoE Discussion Paper Series, January 28, 2020.

Corrado, C., O’Mahony, M. and Samek, L., “Measuring education services using lifetime incomes” ESCoE Discussion Paper Series, January 2020.

Oulton, N., Rincon Aznar, A., Samek, L., & Srinivasan, S., “Double deflation: theory and practice” ESCoE Discussion Paper Series, December 14, 2018.

O’Mahony, M. “Measuring the real output of services activities: An audit of services producer price indexes” Presentation to Voorburg Group, Rome 24 September 2018.

Riley, R., Rincon Aznar, A., & Samek, L., “Below the aggregate: A sectoral account of the UK productivity puzzle” ESCoE Discussion Paper Series, May 15, 2018.

Oulton, N., “The mystery of TFP” ESCoE Discussion Paper Series, October 5, 2017.