Hurdles to workers' and capital's flow between firms: The roots of sluggish productivity

November 09, 2018

Since the financial crisis of 2007, with no seeming reason, productivity growth has been slowing down in all the major economies and in 2016 labor productivity in the US has recorded negative growth for the first time in 30 years. Part of the explanation of this productivity puzzle in advanced economies may lie in a generalized difficulty of reallocating resources between firms in the same industry and in the same geographical area, a new study by Gianmarco Ottaviano, Professor of Economics at Bocconi University, and colleagues, finds. Surprisingly, more difficulties have been recorded in reallocating resources in industries where technology has been changing faster rather than between sectors with different speeds of technological change.

Even though a decade of sluggish productivity is a heavy burden for the countries involved, it hasn't produced enough data to explain the roots of the phenomenon. The country to ideally observe to have a long-enough series of data is Italy, with its 25 years of stagnating productivity growth. A crucial problem with productivity, the Italian case suggests, is resource misallocation: the fact that resources don't smoothly flow from less productive to more productive uses is an important reason for the slowdown.

Misallocation is stronger «within» industries and geographical areas than «between» industries and areas. The most effective policies, in other words, don't promote reallocation of resources from less productive sectors to more productive ones, but from worse to better performing firms in each sector or geographical area.

In an ideal, frictionless condition, the ability to generate revenues from given inputs should be the same for all firms. When firms that generate paltry revenues don't release factors in favor of more productive firms, there is misallocation: the former firms remain inefficiently large and the latter inefficiently small.

Misallocation has substantially increased in Italy since 1995 and this accounts for a large fraction of the Italian productivity slowdown since then. If misallocation had remained at its 1995 level, aggregate total factor productivity would have been 18% higher than its current level and GDP growth per year would have been 1% higher.

The worst-hit firms haven't been the usual suspects, but large firms in Northwestern Italy, operating in industries where the technological frontier has expanded faster.

As the increase in misallocation is largely due to the increase in the share of firms that are inefficiently over-resourced, among the most effective policies to implement there are a smoother regulation of firm bankruptcy procedures, the promotion of a more efficient credit market, with financial operators specialized in firm restructuring and turnaround, and a reform of unemployment benefits, focused on the worker more than on the job.

Among the under-resourced firms there are the firms with a higher investment share in intangible assets such as R&D, branding and marketing, which calls for the development of a non-banking component of the financial markets, as venture capital and private equity are more likely to fund highly innovative, risky firms.

Firms with a higher number of graduates are also under-resourced, signaling that firms find it hard to fill positions requiring a high level of specific skills with the appropriate candidates.
-end-
Sara Calligaris, Massimo Del Gatto, Fadi Hassan, Gianmarco Ottaviano, Fabiano Schivardi, The Productivity Puzzle and Misallocation: An Italian Perspective, in Economic Policy, in Economic Policy, DOI: 10.1093/epolic/eiy014.

Bocconi University

Related Productivity Articles from Brightsurf:

Gender differences in academic productivity during COVID-19 pandemic
During the COVID-19 pandemic, most science and medical faculty began working from home, with women reporting a significant decrease in manuscript submissions.

Char application restores soil carbon and productivity
After two years of char application, researchers find increased soil Carbon, magnesium, and sodium concentrations.

Study compares funding, research productivity for 2 diseases
This study compared federal and foundation research funding for sickle cell disease and cystic fibrosis and investigated whether funding was associated with differences in drug development and research productivity.

Biometric devices help pinpoint factory workers' emotions and productivity
Happiness, as measured by a wearable biometric device, was closely related to productivity among a group of factory workers in Laos, reveals a recent study.

Evolutionary diversity is associated with Amazon forest productivity
An international team of researchers have revealed for the first time that Amazon forests with the greatest evolutionary diversity are the most productive.

New report says accelerating global agricultural productivity growth is critical
The 2019 Global Agricultural Productivity Report, released today by Virginia Tech's College of Agriculture and Life Sciences, shows agricultural productivity growth -- increasing output of crops and livestock with existing or fewer inputs -- is growing globally at an average annual rate of 1.63%.

Private property, not productivity, precipitated Neolithic agricultural revolution
The Neolithic Agricultural Revolution is one of the most thoroughly-studied episodes in prehistory.

Erectile dysfunction associated with lower work productivity in men
Erectile dysfunction (ED) was linked with loss of work productivity and with lower health-related quality of life in an International Journal of Clinical Practice study of more than 52,000 men from eight countries.

Impact of acne relapses on quality of life and productivity
In a study of teenagers and adults suffering from acne who consulted their dermatologist, the acne relapse rate was 44 percent (39.9 percent of ≤20-year-olds and 53.3 percent of >20-year-olds).

Fire air pollution weakens forest productivity
Fire impacts on global carbon cycle. The damage to ecosystem productivity not only occurs in fire regimes, but also over the downwind areas through long-range transport of air pollution.

Read More: Productivity News and Productivity Current Events
Brightsurf.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.