A Tale of Two Sectors: Why is Misallocation Higher in Services than in Manufacturing?
IMF Working Papers, November 15, 2016
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Bibliographic details
- Authors: Daniel A Dias, Christine J. Richmond, Carlos Robalo Marques
- Published: November 15, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475553796.001
Summary findings
- Recent empirical studies document that the level of resource misallocation in the service sector is significantly higher than in the manufacturing sector.
- Conservative estimates for Portugal (2008) show that closing this gap, by reducing misallocation in the service sector to manufacturing levels, would boost aggregate gross output by around 12 percent and aggregate value added by around 31 percent.
- Differences in the effect and size of productivity shocks explain most of the gap in misallocation between manufacturing and services, while the remainder is explained by differences in firm productivity and age distribution.
Quantitative impact
- Country and year: Portugal (2008).
- Estimated aggregate gross output increase if service-sector misallocation equaled manufacturing: around 12 percent.
- Estimated aggregate value added increase under same scenario: around 31 percent.
Drivers and decomposition
- Primary drivers identified:
- Differences in the effect and size of productivity shocks (explains most of the gap).
- Differences in firm productivity distribution (explains part of the remainder).
- Differences in firm age distribution (explains part of the remainder).
- Interpretation of underlying mechanisms:
- Higher output price rigidity in the service sector.
- Greater labor adjustment costs in the service sector.
- More informality in the service sector.
Subject focus and keywords
- Subject: Economic sectors, Labor, Manufacturing, Production, Productivity, Services sector, Total factor productivity.
- Keywords explicitly listed: balance-sheet data, efficiency gain, factor share, firm-level data, Gelbach decomposition, industry classification, industry level, Manufacturing, manufacturing sector industry, Misallocation, ol tne, output price rigidity, output wedge, productivity, productivity distribution, productivity shock, service sector, Services sector, structural transformation, TFP distribution, Total factor productivity, WP.
Authors: Daniel A Dias, Christine J. Richmond, Carlos Robalo Marques; November 15, 2016. Working Paper No. 2016/220. Pages: 50. DOI: https://doi.org/10.5089/9781475553796.001
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- A Tale of Two Sectors: Why is Misallocation Higher in Services than in Manufacturing?