Effects of productivity shocks on hours worked: UK evidence

We provide evidence that positive industry-level productivity shocks cause hours worked to fall in the short run in the UK economy. We use UK industry data, which covers both manufacturing and non-manufacturing industries, and identify productivity shocks using long-run restrictions and structural vector autoregression methodology. Our findings show that the unconditional correlation between growth rates of productivity and hours is negative in almost all the industries, and the correlation conditional on productivity shocks is negative in over three-quarters of the industries. After a positive productivity shock, hours fall in 26 of the 31 industries. The findings at the aggregate level are consistent with those at industry level. We note some striking differences in comparison to the recent US literature. Significantly larger capital adjustment costs in the UK help account for the UK-US differences. Moreover, UK industries with higher investment elasticities (lower capital adjustment costs) have less negative impact effects of hours.