EU KLEMS Growth and Productivity Accounts 2012 release1

Description of methodology and country notes for United Kingdom Prepared by

Reitze Gouma and Marcel Timmer (Groningen Growth and Development Centre)

Introduction

The 2012 EU KLEMS release follows up from the previous release in 2009 which showed detailed growth accounts up to 2007. This new release is similar in concepts and methodologies to calculate the various growth and productivity variables as its predecessors, but it also has a number of new features;

• It provides updates to 2010 and revisions of longer time-series in case national statistical institutes (NSIs) provided these.

• The data on output, value added and employment in EU KLEMS is now fully consistent with the series in the OECD Structural Analysis Database (STAN) at the corresponding industry levels.

• For labour composition use has been made of the micro-data underlying the European Labour Force Survey (LFS) for recent years.

• New investment data up to 2009 has been provided by the EU KLEMS consortium partners • Most importantly, a new industrial classification is used.

Since last year many European NSIs started to produce data based on the new NACE 2 industry classification, which is consistent with the international standardized ISIC Revision 4 industry classification. Accordingly, we adjusted the industrial classification used in EU KLEMS. We distinguish between 35 industries covering the total economy. Many of the industries are a near perfect match with previous NACE 2 industries, but the definition of various other industries has changed and some new industries have been introduced (see below). The NACE 2 output and labour data used in this release is based on OECD Structural Analysis Database (STAN) insofar available. The National Accounts (NA) data in the new classification is provided for shorter time series than were previously available in the NACE 1 classification. Earlier releases of the EU KLEMS databases provide time series back to 1970 with estimations of Total Factor Productivity (TFP) generally starting in 1980. In order to produce estimations of TFP in the new industry classification, back-casts of the time series of output and labour data have been made. These back-casts are based on data in the NACE 1 classification

1 This update of the EU KLEMS database is part of the INDICSER project. This project is funded by the European Commission, Research Directorate General as part of the 7th Framework Programme, Theme 8: Socio-Economic Sciences and Humanities. Grant Agreement no: 244 709 Any errors or omissions are entirely the responsibility of the GGDC (Groningen Growth and Development Centre). For comments and suggestions please send an email to euklems@rug.nl. We are grateful to Bo Werth and Colin Webb from the OECD for providing help with the output and employment data. Furthermore our gratitude goes to Fei Peng and Mary O’Mahony for help and the provision of data from the EU Labour Force Surveys.

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from the November 2009 release, updated in March 2011 and denoted in grey in the new release (see below). An important advantage of a greater alignment of EU KLEMS time series on output and employment is that EU KLEMS users can now easily combine the data with many additional data that is available from the STAN database. Although time-series are generally shorter, for most countries STAN provides more industry detail and additional variables that might be of interest, see the STAN webpage. Part I of this document describes the issues involved in constructing new output files based on the most recent data available in the NACE 2 industry classification. Furthermore it provides the methods applied for the estimation of back casts of the time series using available data in the NACE 1 industry classification. Part II covers the country specific notes on construction issues and revisions of the source data. A brief overview is provided of the most important changes compared to earlier releases of the EU KLEMS database. The appendix shows the industry mapping tables that are used for the estimation of the output, capital and employment variables. PART I General notes for the 2012 release

This section details the general methods applied in this EU KLEMS release to arrive at estimates of total factor productivity in the new NACE 2 industry classification. In this section the main differences between the old NACE 1 and the new NACE 2 classification are briefly highlighted. Additionally this section covers the methods applied for the back-casting of time series of output and labour in NACE 2, the incorporation of revised investment series and the updating procedure of labour services. For more detailed information on the general growth accounting methodology and construction of the database, see O’Mahony, Mary and Marcel P. Timmer (2009)2

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Industry Classification changes When producing back-casts of times series, industry mappings between the old and the new classifications have to be made. For many industries the NACE 1 and NACE 2 industry classifications are a close or even one to one match. However, the new NACE 2 classification also features a number of industries which are completely new and are comprised of multiple activities at the 4-digit level spread across many NACE 1 2-digit industry aggregates. For these industries it is impossible to make a perfect match given the level of detail at which NACE 1 and NACE 2 data is currently available, hence compromises have been made. The short list below indicates the most problematic industries:

• Postal and courier activities are allocated to NACE 2 industry 53 whereas in NACE 1 these activities were part of Post and Telecommunications, combined in the 2-digit industry 64.

• The NACE 2 sector J, Information and communication, consists of Publishing, Audiovisual and broadcasting activities (58-60), Telecommunications (61), and IT and other information services (62-63). These activities consist of multiple NACE 1 industries belonging to several 2-digit sectors. Sector J is the sectors for which time series estimates will be most inaccurate. A split of NACE 1 industry 64 is not available in EU KLEMS so in general Postal and Courier activities are included in the estimation of the growth of J.

2 O’Mahony, Mary and Marcel P. Timmer (2009), ‘Output, Input and Productivity Measures at the Industry Level: the EU KLEMS Database’, Economic Journal, 119(538), pp. F374-F403

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The next section presents the mapping tables that have been used for the estimation of the different variables at different levels of industry detail. Back-casting time series in EU KLEMS Whenever the STAN data is missing official values for output and labour data, the series are back-casted from the first year for which official data is available. The availability of data is dependent on the country and is indicated in the country specific notes. Appendix table 1 details the many to one NACE 1 – NACE 2 industry mapping. It is based on the detailed 72 industries list which is available in the March 2011 update of the November 2009 release of the EU KLEMS database (09ii release) for output and labour variables.

The appendix table shows which NACE 1 industry or combination of NACE 1 industries from the 09ii output file are used to calculate a growth rate, which is applied to the value of the NACE 2 industry in the following year. This is done only for the most detailed NACE 2 industries (lowest level). Industry aggregates are calculated from the bottom up, following the same approach as in previous EU KLEMS releases. For nominal variables the NACE 1 industries are aggregated by simple summation in order to calculate the NACE 2 industry’s growth rate. For volumes and price deflators a Tornqvist3

growth rate is calculated from the NACE 1 industries, using the corresponding nominal variable as weights. For back-casts of data on hours worked the growth trend of average hours worked is calculated using the same industry mapping. The resulting estimated average of hours worked for the NACE 2 industry is multiplied by the number of persons employed to arrive at values for total hours worked.

Investment series and capital services Investment data by industry and asset type have been supplied by NSI’s or partners previously part of the EU KLEMS consortium. These data are supplied in the NACE 1 industry classification and a country specific industry concordance is made to map the NACE 1 industries to NACE 2 industries for the investments series. The investment concordance table for this country is available in appendix table 2. Due to lack of detail in the NACE 1 investment series, investment for some NACE 2 industries is only estimated for the aggregate. In these cases the investment series are split using Value Added (VA) shares. Investment price deflators for the lower level industries are assumed to be equal to the price deflator of the aggregate industry. This is generally the case for NACE 2 industries J (Information and Communication) and H (Transportation and Storage). Initial capital stocks are estimated based on Capital Stocks to Value Added ratios from the 09ii output and capital input files, in a country dependent initial year, usually 1970. Since capital stocks in the 09ii release are only available at a level of 32 industries, a separate 1 to 1 industry concordance is used, to map the NACE 1 ratios to NACE 2 industries. This concordance table is available in appendix table 3. The ratios are multiplied by industry Value Added in the NACE 2 classification to arrive at initial capital stocks. Time series of capital stocks are calculated using the Perpetual Inventory Method (PIM)4

In order to calculate Capital compensation (CAP) by asset type, required for the calculation of capital services, an internal rate of return is calculated for the NACE 2 industries based on derived

. Industry depreciation rates are included in the new capital input files.

3 The Tornqvist aggregation approach uses annual moving weights based on averages of adjacent points in time. For more information on this procedure see the general EU KLEMS methodology document. 4 For a detailed description see the general EU KLEMS methodology document.

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CAP values from the national accounts. For the period for which official NACE 2 output and labour data is available, CAP is derived using the standard EU KLEMS approach where CAP equals VA minus labour compensation (LAB). LAB is calculated by assuming the self-employed receive the same hourly wages as employees. Prior to the period for which official data is available, the original EU KLEMS shares of LAB and CAP in VA are applied. Labour services The growth of labour services per hour worked (LAB_QPH) is based on tabulations of the micro-data taken from EUROSTAT’s Labour Force Survey (LFS) data. These data are only available at a high level of aggregation for short period, generally 2003-2009. Generally they cover information on number and wages of employees only and do not cover self-employed or hours. As in the previous EU KLEMS releases growth rates in labour services are calculated through a Tornqvist aggregation of growth rates of 18 detailed types of workers (classified by gender, 3 types of educational attainment and 3 age classes). Wages for each type are used as weights.

Data for 2008 and 2009 is often available in the new NACE 2 classification, but not for earlier years. Table 4 in the appendix shows the mapping of NACE 1 to NACE 2 aggregate industries. All lower level industries that are part of the NACE 2 aggregate industry receive the same growth rate of LAB_QPH as the aggregate industry. Prior to the period for which the new LFS data is available the growth rate of LAB_QPH from the 09ii output file is used, applying the same NACE 1 to NACE 2 mapping as is used for the capital stock ratios (appendix table 3) such that detailed industry trends (if available) are retained. To the growth rate of LAB_QPH for each industry, the growth of hours worked is added to arrive at an index for total labour services (LAB_QI).

PART II Country specific notes: UNITED KINGDOM

Release EU KLEMS files: 24 October 2012 Release STAN file: Pending Synopsis of the main points

• Official output and labour data in NACE 2 from STAN are available for 1997-2010. • No data on hours worked available, average hours worked from the 09ii file is used. • Major revisions in the investment series, for all years, assets and industries. • New LFS data for 2002-2009.

Output and labour Official output and labour data in NACE 2 from STAN are available for 1997-2010. No data on hours worked is available in the STAN database for NACE 2 industries. Therefore average hours worked from the 09ii output file are used to estimate hours worked for NACE 2 industries. A slightly adjusted version of the 1 to 1 concordance table, shown in appendix table 3, was used for this. The average of hours worked for NACE 2 industry 31-33 was estimated by NACE 1 industry 36 instead of 36t37. Similarly the average of hours worked for NACE 2 industry 62-63 was estimated by NACE 1 industry 72 instead of 71t74. For the years 2008-2009 data on hours worked was extended using the growth pattern of average hours worked at the total economy level taken from EUROSTAT. Only a partial

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split of the ‘Transport and Storage’ industry (H) was available from STAN. Further splits have been calculated based on Value Added shares. Back casts for output and labour variables prior to 1997 have been done based on the output data from the 09ii file, using the ‘many to one’ concordance table shown in appendix table 1. Shares of Labour and Capital compensation in Value Added for 1970-1996 are derived following the same method as for later years. This was done since the investment data has been heavily revised by ONS5

Output and labour data have changed for the period 1997-2007, although most of the revisions have occurred in the later years, 2005-2007. A slight drop in output and labour growth can be observed.

for the whole period.

Capital New UK investment data has been supplied by NIESR6

for the period 1949-2009. Revisions have been implemented for the whole series and across all asset types. For total assets, the changes range from an upward revision of between 6 and 12 percent for the 1970-2009 period. The initial capital stock based on Capital stocks to Value Added ratios is estimated for 1970. Growth rates for non-IT capital services have declined and IT capital services have been strongly increased in the more recent years.

Labour composition LFS data is available for 2002-2009. For the period prior to 2002 the labour composition per hour worked growth rate from EU KLEMS 09ii has been applied. Total Factor Productivity Even though the investment data has been revised considerably, TFP has changed only moderately for broad sectors, generally less than 1 percent, except for agriculture where changes are mainly due to revisions in employment. Especially in the years prior to 1997, where output and labour data is based on growth rates from the 09ii release, TFP has remained comparable to earlier results. The contributions of the different factors of production, the contributions of IT and non-IT capital in particular, have changed somewhat, in line with the revisions of the growth rates of capital services.

5 Office for National Statistics 6 National Institute of Economic and Social Research

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NACE 1 list (many to 1 mapping) NACE 2 NACE 2 DescriptionAggregate TOT TOTAL INDUSTRIESAtB A AGRICULTURE, FORESTRY AND FISHINGC B MINING AND QUARRYINGAggregate C TOTAL MANUFACTURING15t16 10-12 Food products, beverages and tobacco17t19 13-15 Textiles, wearing apparel, leather and related products20 16-1821 16-1822x 16-1823 19 Coke and refined petroleum products24 20-21 Chemicals and chemical products25 22-2326 22-23

27t28 24-25Basic metals and fabricated metal products, except machinery and equipment

30t33 26-27 Electrical and optical equipment29 28 Machinery and equipment n.e.c.34t35 29-30 Transport equipment

36 31-33Other manufacturing; repair and installation of machinery and equipment

37 D-EE D-E90 D-EF F CONSTRUCTION

Aggregate GWHOLESALE AND RETAIL TRADE; REPAIR OF MOTOR VEHICLES AND MOTORCYCLES

50 45Wholesale and retail trade and repair of motor vehicles and motorcycles

51 46 Wholesale trade, except of motor vehicles and motorcycles52 47 Retail trade, except of motor vehicles and motorcyclesAggregate H TRANSPORTATION AND STORAGE60t63 49-52 Transport and storage64 53 Postal and courier activitiesH I ACCOMMODATION AND FOOD SERVICE ACTIVITIESAggregate J INFORMATION AND COMMUNICATION221 58-60 Publishing, audiovisual and broadcasting activities921t2 58-60 Publishing, audiovisual and broadcasting activities64 61 Telecommunications72 62-63 IT and other information servicesJ K FINANCIAL AND INSURANCE ACTIVITIES70 L REAL ESTATE ACTIVITIES71 M-N73 M-N74 M-NAggregate O-U COMMUNITY SOCIAL AND PERSONAL SERVICESL O Public administration and defence; compulsory social securityM P EducationN Q Health and social work

Aggregate R-SARTS, ENTERTAINMENT, RECREATION AND OTHER SERVICE ACTIVITIES

923t7 R Arts, entertainment and recreation91 S93 S

P TActivities of households as employers; undifferentiated goods- and services-producing activities of households for own use

Q U Activities of extraterritorial organizations and bodies

Other service activities

Industry concordance for back casts of nominal output and labour data

Wood and paper products; printing and reproduction of recorded media

Rubber and plastics products, and other non-metallic mineral products

ELECTRICITY, GAS AND WATER SUPPLY

PROFESSIONAL, SCIENTIFIC, TECHNICAL, ADMINISTRATIVE AND SUPPORT SERVICE ACTIVITIES

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UK industry

EU KLEMS NACE 1 concordance

EU KLEMS NACE 2 concordance Description

1 1 A Agriculture2 2 A Forestry 3 5 A Fishing 4 10 B Coal extraction

Industry concordance for UK Investment data

4 10 B Coal extraction5 11, 13 B Oil & gas & metal ores extractionextraction 6 12, 14 B Other mining & quarrying7 15 10-12 Food and drink8 16 10-12 Tobacco9 17 13-15 Textiles10 18 13-15 Wearing Apparel, Dressing And Dying Of Fur11 19 13-15 Leather, leather products and footwear12 20 16-18 Wood and products of wood and cork12 20 16 18 Wood and products of wood and cork13 21 16-18 Pulp, paper & paper products 14 22 J Printing & publishing 15 23 19 Coke, refined petroleum products and nuclear fuel16 24 20-21 Chemical products and man-made fibres17 25 22-23 Rubber and plastic products18 26 22-23 Other non-metallic mineral products19 27 24-25 Basic metals 20 28 24-25 Fabricated metal products21 29 28 M hi d i l h l ifi d21 29 28 Machinery and equipment not elsewhere classified22 30 26-27 Office machinery and equipment 23 313 26-27 Insulated wire24 31x, 321 26-27 Other electrical machinery and apparatus nec25 322, 323 26-27 Radio, TV and communication equipment 26 33 26-27 Medical, precision and optical instruments 27 34t35 29-30 Transport equipment28 36 31-33 Other manufacturing29 37 D E Recycling29 37 D-E Recycling30 40 D-E Electricity & Gas31 41 D-E Water supply32 F F Construction33 50 45 Motor vehicle distribution & repairs, fuel 34 51 46 Wholesale distribution 35 52 47 Retail distribution 36 H I Hotels and restaurants37 60 49-52 Land transport& transportvia pipelines37 60 49 52 Land transport& transportvia pipelines 38 61 49-52 Water transport 39 62 49-52 Air transport 40 63 49-52 Ancillarytransport services 41 64 53 Post &tele-communications 42 65 K Financial intermediation 43 66 K Insurance &pension funds 44 67 K Auxiliaryfinancialservices 45 70 L Real estateactivities 46 71 M-N Renting ofmachinery etc 47 72 J Computer services 48 73 M-N Research and development 49 74 M-N Otherbusiness services 50 L O Public administration& defence 51 M P Education 52 N Q Health and social work 53 90 D-E Sewage &sanitaryservices 54 91 R S Membership organisations54 91 R-S Membership organisations 55 92 J Recreationalservices 56 93 R-S Other service activities

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NACE 1 list (1 to 1 mapping) NACE 2 NACE 2 DescriptionAggregate TOT TOTAL INDUSTRIESAtB A AGRICULTURE, FORESTRY AND FISHINGC B MINING AND QUARRYINGAggregate C TOTAL MANUFACTURING15t16 10-12 Food products, beverages and tobacco17t19 13-15 Textiles, wearing apparel, leather and related prodcuts

21t22 16-18Wood and paper products; printing and reproduction of recorded media

23 19 Coke and refined petroleum products24 20-21 Chemicals and chemical products

26 22-23Rubber and plastics products, and other non-metallic mineral products

27t28 24-25Basic metals and fabricated metal products, except machinery and equipment

30t33 26-27 Electrical and optical equipment29 28 Machinery and equipment n.e.c.34t35 29-30 Transport equipment

36t37 31-33Other manufacturing; repair and installation of machinery and equipment

E D-E ELECTRICITY, GAS AND WATER SUPPLYF F CONSTRUCTION

Aggregate GWHOLESALE AND RETAIL TRADE; REPAIR OF MOTOR VEHICLES AND MOTORCYCLES

50 45Wholesale and retail trade and repair of motor vehicles and motorcycles

51 46Wholesale trade, except of motor vehicles and motorcycles

52 47 Retail trade, except of motor vehicles and motorcyclesAggregate H TRANSPORTATION AND STORAGE60t63 49-52 Transport and storage64 53 Postal and courier activitiesH I ACCOMMODATION AND FOOD SERVICE ACTIVITIESAggregate J INFORMATION AND COMMUNICATION21t22 58-60 Publishing, audiovisual and broadcasting activities64 61 Telecommunications71t74 62-63 IT and other information servicesJ K FINANCIAL AND INSURANCE ACTIVITIES70 L REAL ESTATE ACTIVITIES

71t74 M-NADMINISTRATIVE AND SUPPORT SERVICE ACTIVITIES

Aggregate O-U COMMUNITY SOCIAL AND PERSONAL SERVICES

L OPublic administration and defence; compulsory social security

M P EducationN Q Health and social work

Aggregate R-SARTS, ENTERTAINMENT, RECREATION AND OTHER SERVICE ACTIVITIES

O R Arts, entertainment and recreationO S Other service activities

P TActivities of households as employers; undifferentiated goods- and services-producing activities of households for own use

Q U Activities of extraterritorial organizations and bodies

Industry concordance for the estimation of initial stocks

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NACE 1 NACE 2 NACE 2 DescriptionA,B A AGRICULTURE, FORESTRY AND FISHINGC B MINING AND QUARRYINGD C TOTAL MANUFACTURINGE D-E ELECTRICITY, GAS AND WATER SUPPLYF F CONSTRUCTION

G GWHOLESALE AND RETAIL TRADE; REPAIR OF MOTOR VEHICLES AND MOTORCYCLES

I H TRANSPORTATION AND STORAGEH I ACCOMMODATION AND FOOD SERVICE ACTIVITIES

K J, L, M-NINFORMATION AND COMMUNICATION, REAL ESTATE, PROFESSIONAL, SCIENTIFIC, TECHNICAL, ADMINISTRATIVE AND SUPPORT SERVICE ACTIVITIES

J K FINANCIAL AND INSURANCE ACTIVITIESL O REAL ESTATE ACTIVITIESM P EDUCATIONN Q HEALTH AND SOCIAL WORK O,P,Q R-U OTHER SERVICE ACTIVITIES

Industry concordance for labour composition by broad sectors

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