Zombie firms and low UK Productivty

The collapse in UK productivity since the recession is ever more mysterious.  Might it be the fault of Zombie firms: low productivity firms who are kept in business by the forbearance of banks and who would otherwise go out of business and raise productivity  via the beneficial averaging effect of their exit?

What do we know?

1. Disney, Haskel and Heden document that 50% of productivity growth in UK manufacturing over a decade is driven by the batting average effect of entry and exit of high and low productivity firms respectively.

2. The FT have a recent feature, with some interesting work  cited from the Bank

"The Bank of England recently lent the theory some weight, pointing out that about 30 per cent of companies were lossmaking in 2010, a bigger proportion than in the 1990s recession, yet corporate insolvency rates during this downturn have been much lower than in previous ones."

3. The ONS have an important new paper looking at changes in firm productivity up to 2009, using their very comprehensive data.  Since they have access to the company register, this is a very large sample of firms.

Their data suggest there may be something to the Zombie view. The figures below shows , for market services , the average productivity of firms in the lowest and highest quartiles of the labour productivity.  There is a fall in 2009 and a hint that the lower tail of firms are lower in those years than before.  Note that before the recession the upper tail had been widening.  So the recession seems to have cut off the very highest performers and lengthened lowest tail, widening the productivity distribution. 








One thing that is very puzzling however, is that small firms in market services are much more productive than large ones as their Figure 3 shows  (size class 4 are above 250 and class 1 below 20).

 

 And the averaging effect is shown here:





This shows that over the 2000s most employment growth was in the low productivity firms (Quartile 1). the left hand bars, which should have retarded productivity.  So what's going on?  My guess is this: large service sector firms employ likely a lot of part-timers (e.g. large retailers).   So per labour hour they are more productive, but per employee as shown here, less so.  Thus the interpretation of Figure 42 is that the sorting effect has beeen working in the 2000s to raise true productivity since its been working in favour of the large firms.  So what's been happening in the recession?  In 2008 and 2009  it looks like the smaller firms, that is the right hand lines, are gaining employment relatively more than the larger ones.  That is, the left blue line is lower relative to the right hand lines.  This agains suggets the sorting effect is working less well.


More puzzles but credit the ONS for using their considerable data resources to try to figure out this problem.

Do countries need to exit the Euro? Maybe not..

Charles Wyplosz writes about the Euro prospects here.  He makes the interesting point that countries in Eurozone have seen very high adjustments in relative unit labour costs even within the Euro.  The OECD economic outlook shows this

Various links.

1. http://www.newyorkfed.org/research/current_issues/ci18-5.pdf.  Interesting article on Short Selling from the New York Fed, suggesting that it does not work.

2.  Interesting links from the FT


Apple: Innovator’s dilemma
Fast-evolving technologies provide a typical context for disruptive innovations. In this type of environment, diagnosing a company on being just an incremental innovator should unveil a red light.

A case remains for economic liberalism
Unethical economic liberalism in an unequal market structure might be as bad as social democracy without a culture of effort and a work ethic.


3. lots of fascinating ideas here on whether one should consume locally
http://www.econlib.org/library/Columns/y2011/LuskNorwoodlocavore.html 


4. Marginal tax rates in the UK
http://johnhcochrane.blogspot.co.uk/2012/12/benefits-trap-art.html#more

I dont know if these graphs are true, there is no citation other than internal government sources


A quick look at the IFS website finds this
http://www.familyandparenting.org/Resources/FPI/Documents/FPI_IFS_Austerity_Jan_2012.pdf

p.29 a selection of marginal particicipation and in work tax rates of near 53% on average. 

And more detail is here on page 15ff
http://www.ifs.org.uk/wps/wp1024.pdf

A quote sum up participation tax rates. 

Figure 2.4 shows the cumulative distribution of PTRs for the whole adult
population below state pension age, including non-workers using
predicted earnings in work as described above. Reading across, we can see
that around 20% of adults under the state pension age have PTRs below
40%, and 30% have PTRs above 60%. This means that around half of
adults below the state pension age have PTRs in a relatively narrow band
from 40% to 60% – their earnings can buy them about half of what they
cost their employer. It is also clear that one of the reasons non-workers do
not work is that the incentive for them to work at all is, on average, weaker
– around 30% of non-workers have PTRs above 70%, compared to only
10% of workers. Indeed, of those who have PTRs greater than 70%, 60%
do not work.

And effective marginal tax rates

There is a small but significant group of around 10% of workers who
would only keep between 17p and 27p of each additional pound they
earned. This is because they face steep withdrawal of tax credits or
housing benefit if they increased their earnings a little.

My reading of the graph is that 20% of workers face >60% marginal tax rates.

Remarkably, these burdens have hardly changed over time.