Case studies
Video text transcript
As you may have seen in the budget on Tuesday, there was this provision to change the planning regulations, and in the documents that the Treasury and BIS issued they said that one of the snags with planning regulations is that it held back productivity.
You might ask yourself 'What was the evidence base for this?' And it turns out the evidence base for this came out of work that was done in the lab.
What Raffaella Sadun and I did is we went into the lab a few years ago and we discovered that on the service sector side all the microdata (which people hadn't used so much, they mostly used the manufacturing) -- but on the service sector side, there was quite a lot of rich data on supermarkets and retailers in general.
The particular data we looked at was this: that on what is now the Business Structure Database, there was information about the size of different shops within particular supermarket chains and one of the things that regulation did is that is forced companies to open much smaller stores. You see that with Tesco Metro and Sainsbury's Local. And we were able to correlate, using microdata, a relationship between the productivity of the whole chain and the average size of the stores within the chain.
What we found is there was a loss of economies of scale because these firms had to open these smaller stores. And that fed through to a fall in productivity. That fall in productivity contrasted very sharply with the US where -- because of Wal-Mart opening very big stores -- there's been a very substantial rise in US retailing productivity.
So that kind of information from the lab, we took that out, we managed to publish that paper, and we got policy makers interested in it and hopefully it's led to some actual changes in the legislation.
The effects of regulation on UK retailing productivity
Recent years have seen productivity growth revving up in the US while stagnating in the UK. To what extent is planning regulation in the UK responsible?
The study
Much attention has focused on the retailing and wholesaling sector, which appears to account for a large share of both the US speedup and the UK slowdown.
This study documented a shift to smaller shops, particularly within supermarket chains, following a regulatory change in 1996 which increased the costs of opening large stores. This might have caused a slowdown in productivity growth if firms (a) lose scale advantages by moving to smaller stores and (b) lose scope advantages if existing organisational knowledge appropriate to larger stores is not perfectly substitutable with the organisational capital required to run smaller stores.
The data
The authors used data from the ONS Annual Business Inquiry (ABI) via the Virtual Microdata Laboratory at the Office for National Statistics. The ABI is a statutory survey which collects very detailed financial and employment data for businesses throughout the UK. The microdata are used by the ONS to compile a number of official statistics, including Gross Domestic Product (GDP).
By accessing these data, the researchers were able to evaluate the growth of smaller supermarket stores, following the introduction of the planning regulations. For instance, they could examine how many smaller shops were established by the supermarket retailers.
Without such detailed microdata, it would not have been possible to conduct this analysis. Information about individual companies and their branches, and their employment and financial performance, were required by the researchers in order to derive their conclusions. Successful studies such as this would not be made possible with more aggregated data.
The results
An analysis of ABI microdata shows a relation between chain-level total factor productivity (TFP) for multi-store chains and various measures of the size of the stores within the chain.
The study results suggest the fall in within-chain shop sizes was associated with a lowering of chain TFP by about 0.4 percent per year - or roughly 40 percent of the post-1995 slowdown in UK retail TFP growth. The foregone productivity works out at about £80,000 per small chain supermarket store.
The authors
Jonathan Haskel is a professor of economics at Imperial College Business School, based in the Healthcare Management and Innovation and Enterprise Group. He also heads the Centre for Research into Business Activity (CeRiBA).
Raffaella Sadun completed her PhD in economics at the London School of Economics in 2008. She is now an assistant professor in the Strategy Unit at Harvard Business School.