related mechanism relates to changes in employment shares from high productivity sectors to lower productivity sectors. the scale of the changes in sectoral employment shares to date can account for some, but only a small proportion, of the productivity shortfall. see the box on pages 22 – 23 of the august 2011 inflation report. employment data may also be prone to revision reflecting possible sampling errors. headline productivity figures are based on the regular labour force survey of households. the workforce jobs measure of employment reported by businesses has been weaker over the recovery to date. if the lfs measure were revised towards workforce jobs, that could raise productivity per head by around 2 percentage points. but survey evidence broadly supports the lfs measure of employment and workforce jobs data have been revised in the past towards the lfs measure. bis central bankers ’ speeches strong growth in financial sector balance sheets. it does not seem sensible – certainly with the benefit of hindsight – to think that this strong growth would continue indefinitely. re - estimating the scale of the productivity puzzle using more plausible estimates for trend productivity growth in these two sectors reduces the size of the productivity shortfall by up to 2 percentage points – that is from around 9 % to 7 % – with the majority of that difference reflecting slower underlying productivity growth within the energy extraction sector. extrapolating from the past may also be misleading if some businesses were operating at above normal levels of capacity utilisation prior to the recession. if that were the case, some of the subsequent slowdown in productivity growth would simply reflect the need for companies to adjust to more sustainable operating levels. and that indeed appears to be the case, with business surveys pointing to above average capacity pressures in both the manufacturing and services sector prior to the recession. the implied required adjustment may account for around a further 1 % point of the productivity shortfall. 8 taking account of changes in productivity trends within key sectors of the economy and of the position of the economy prior to the start of the recession may account for around one third of the productivity shortfall. but even if we combine both of these factors with the impact of the likely upward revision to gdp, this still leaves a sizeable productivity puzzle – of around one half of the productivity shortfall – to explain. the third explanation is that underlying productivity growth has been weakened by the impact of the financial crisis. it is notable that this explanation is consistent with evidence from business surveys of spare capacity which suggest that underlying productivity growth in the manufacturing and services sector has essentially stagnated since

the start of the recession ( charts 5 and 6 ). 9 what might account for this flat lining in potential productivity? impact of financial crisis in an accounting sense, this stalling in productivity growth must be attributable to one of two factors. a slowing in the rate at which companies have added to the physical capital used by each member of their workforce. or a slowing in the pace of efficiency gains associated with the way in which companies combine capital and labour to produce output, known in the jargon as total factor productivity. in reality, it is unlikely that a slowing in the pace of capital accumulation contributed significantly to the weakness of productivity. this is largely a matter of arithmetic. annual business investment flows are small relative to the size of the capital stock. so even though business investment fell by around a quarter in the year following the collapse of lehman brothers, and remains 20 % below its pre - crisis level, it is unlikely to have had a significant impact on the stock of capital available per worker. 10 evidence from business surveys ( eg bcc, cbi ) and the bank ’ s agents suggest that capacity utilisation was above normal in both manufacturing and services sectors. qualitative survey balances can be adjusted to match the mean and variance of an estimated productivity gap from which inference about productivity may be drawn. see charts 3. 7 and 3. 8 in the august 2011 inflation report. potential productivity is constructed using the bcc surveys of capacity utilisation and productivity data from the ons for the manufacturing sector and private services excluding finance sector. the bcc survey asks firms whether they are operating at or below full capacity. since the survey measures are qualitative, they have been mean and variance adjusted over the period 1989 to 2006 to infer a measure of the gap between actual and potential productivity. the trends shown in charts 5 and 6 are chosen such that the shortfall between actual and potential productivity maps closely to the mean - and - variance - adjusted survey measures of spare capacity. the annual flow of business investment prior to the recession averaged around 7 % of the uk capital stock. a 20 % reduction in business investment for 5 years would result in the capital stock being only around 2 % lower ( assuming plausible assumptions for the rate of depreciation ). bis central bankers ’ speeches it is possible that this simple arithmetic underestimates the impact of the falls in investment spending, particularly if the falls were concentrated in highly - productive forms of investment. perhaps because