Stephen Aldridge highlights three charts with a striking message for the UK
Economic dynamism is the process by which a country’s labour, capital and ideas are reallocated towards more productive uses. It allows high-performing firms and sectors to expand, while lower-productivity activities contract. It is the means by which individual workers secure better-matched jobs, higher wages and greater career progression.
The UK’s recent record in this regard is disappointing. As the Government’s Industrial Strategy document put it earlier this year, “Market dynamism, shifting resources from lower to higher productivity firms, was once the largest component of UK growth. However, dynamism is now lacking, with businesses expanding more slowly and new roles being recreated at a slower rate.1
Creative destruction matters: without it, the UK risks entrenching low growth and limiting its ability to achieve long-term economic goals – a primary objective of the Government’s Growth Mission.2
Three charts recently brought home to me the importance of economic dynamism.
Sectoral reallocation
Figure 1 shows how the shift of activity from lower to higher productivity sectors has slowed since the 2008 financial crisis, reducing its contribution to productivity growth.
Over time, the overall shift of workers has generally been from lower to higher productivity industries. This has been a tailwind for improved economic performance, contributing 0.4 percentage points per year to growth in the pre-financial crisis decade. But in the decade that followed, the contribution to growth from this kind of industrial reallocation across the economy fell to zero.3
Figure 1: A dive in dynamism over the last generation Sectoral reallocation expressed as a % of total employment: UK
Source: Resolution Foundation analysis of ONS Workforce Jobs; and Bank of England Millennium of Macroeconomic Data |
Job reallocation (or ‘churn’)4
Defined as the sum of jobs created and destroyed, rates of job reallocation have fallen below pre-2008 levels as shown in Figure 2. Total job reallocation has fallen from 31% in 2001 to 21% by 2023, which can be mostly attributed to incumbent firms.5 This means there is less movement of workers between firms – and towards more productive ones – and therefore fewer opportunities for high-productivity businesses to grow.
The UK is reliant on high productivity “frontier” firms for growth. The contribution to labour productivity growth of the top 10% of firms, for instance, has increased between 2011 and 2019 when compared to the decade before the financial crisis.
That reliance on frontier firms is all the more important given lower dynamism among the wider business population, especially ‘middling’ firms between the 50th and 90th percentile of labour productivity. The reduced pace of productivity-enhancing reallocation helps explain the slowdown in aggregate productivity growth since the mid-2000s. In 2011-2019, “frontier” firms drove over two-thirds of overall UK productivity growth, up from half in 1998-2007. The slowdown in “middling” firms is even more worrying given workers are unevenly spread across the productivity distribution; in 2022, 71% of total UK workers were employed by firms with labour productivity below the mean.6
Figure 2: Job reallocation between firms has been falling7 Annual churn in UK jobs attributable to firms hiring, firing, starting up or shutting down
Source: Resolution Foundation analysis of ONS Business Structure Database |
It pays to move
A healthy degree of job reallocation is a key driver of dynamism in the wider economy. However, the share of job-to-job moves in 2019 had declined by a quarter compared to 2000.8
Fewer job-to-job moves come at a price, in terms of lower productivity growth, as well as for the individual workers concerned. As Figure 3 shows, average wage rises are around four-fold higher for those who move jobs compared to those who do not, rising to nearly six-fold among those who switched not only their firm, but also their region or sector.9
| Figure 3: It pays to move on10 Median annual growth in CPIH-adjusted hourly pay, 2005-20: GB
Source: Resolution Foundation and Centre for Economic Performance analysis of ONS ASHE |
Stephen Aldridge is Director, Analysis and Data at the Ministry of Housing, Communities & Local Government.
Footnotes
- Department for Business and Trade, The UK’s Modern Industrial Strategy, 2025.
↩ - HMG, Plan for Change, 2024.
↩ - R Davies et al., Ready for Change: How and Why to Make the UK Economy More Dynamic, Resolution Foundation, September 2023.
↩ - R Davies et al., Ready for Change. Note: Sectoral reallocation is measured as the weighted average, across sectors, of the absolute change in employment share compared to a decade ago, based on a measure used in the US by G Chodorow-Reich & J Wieland, Secular Labor Reallocation and Business Cycles, Journal of Political Economy 128(6), April 2020. The red line uses SIC 2007 sections, but some have been condensed for consistency with long-run data; the blue line uses the full set of industry sections in SIC 2007, for which Workforce Jobs data is available from 1978 onwards.
↩ - ONS, Trends in UK Business Dynamism and Productivity, 2024.
↩ - ONS, Trends in UK Business Dynamism and Productivity.
↩ - R Davies et al., Ready for Change. Note: Rates are defined as total jobs created or destroyed in a particular period relative to the stock at the end of the previous period. Rates are percentages as a proportion of the total workforce. Non-market sectors (education, healthcare) and the financial and real estate sectors are excluded.
↩ - N Cominetti et al., Changing Jobs?: Change in the UK Labour Market and the Role of Worker Mobility, Resolution Foundation, January 2022.
↩ - R Davies et al., Ready for Change.
↩ - Resolution Foundation & Centre for Economic Performance, LSE, Ending Stagnation: A New Economic Strategy for Britain, Resolution Foundation, December 2023.
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