Misallocation and Productivity in the Lead Up to the Eurozone Crisis (original) (raw)
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Journal of Economic Studies, 2018
Purpose Recent studies have linked differences in aggregate productivity to misallocation of resources across firms. In contrast, the purpose of this paper is to study the macroeconomic performance of OECD economies from a production efficiency point of view and estimated the determinants of (in)efficiency with particular emphasis on misallocation of labor. Design/methodology/approach Following the pioneering work of Battese and Coelli, the authors proposed a parametric methodology to construct a world frontier that serves as a benchmark to compare the relative position of each country. The non-negative technical inefficiency effects are assumed to be a function of explanatory variables. By doing this, determinants of technical inefficiency are explicitly introduced in the model. Findings The results revealed that OECD countries to operate efficiently should expand their aggregate output by 22.6 percent without consuming more resources. A novel finding is that higher skill mismatch is associated with higher production inefficiency. Conversely, more flexible labor markets, and better management and human resource practices, lowered the inefficiency in production. The paper also analyzed the underlying factors driving skill misallocation in the job market. In this regard, a well-functioning education and training system and greater flexibility in the determination of wages are associated with lower levels of mismatch between the skills of individuals and those required by the jobs. Practical implications The measurement of the productive efficiency of an economy (or country) is crucial to governments. It is important to know how far a given economy can be expected to increase its output by simply increasing its efficiency, without absorbing further resources. In other words, it is relevant to know if a country could produce more with the same resources and, therefore, could increase per capita income and welfare. In this type of analysis what also matters is to identify what factors or variables explain that greater or lesser ability of a country to convert its resources into aggregate production. Originality/value Much research on efficiency measurement has focused on the firm or industry level, mainly to study the efficiency of financial institutions. Efficiency studies using aggregated data across countries are rare in the literature of efficiency. This paper aimed to contribute to filling that shortage evaluating the macroeconomic performance of a sample of OECD countries from the production efficiency point of view.
Resource misallocation and production inefficiency
Journal of Economic Studies, 2018
Purpose Recent studies have linked differences in aggregate productivity to misallocation of resources across firms. In contrast, the purpose of this paper is to study the macroeconomic performance of OECD economies from a production efficiency point of view and estimated the determinants of (in)efficiency with particular emphasis on misallocation of labor. Design/methodology/approach Following the pioneering work of Battese and Coelli, the authors proposed a parametric methodology to construct a world frontier that serves as a benchmark to compare the relative position of each country. The non-negative technical inefficiency effects are assumed to be a function of explanatory variables. By doing this, determinants of technical inefficiency are explicitly introduced in the model. Findings The results revealed that OECD countries to operate efficiently should expand their aggregate output by 22.6 percent without consuming more resources. A novel finding is that higher skill mismatch ...
About the efficiency behavior of the Portuguese manufacturing firms during the financial crisis
2018
This work studies some effects of the World Financial Crisis on firms in terms of efficiency scores, by measuring how 23K units used inputs and produced outputs, obtained from a set of Portuguese manufacturing firms on three time periods: pre-crisis (2006-2008), pre-troika (2009-2011) and troika (2012-2013). We adopt a non-parametric approach, which combines Multidirectional Efficiency Analysis (MEA) with other techniques as cluster analysis, principal component analysis and dimensionality testing, to examine three empirical hypotheses: H(1) the performance of the firms in the manufacturing sector has been adversely affected by the financial crisis; H(2) due to the financial crisis, the manufacturing sector acquired long-term debt deliberately; and H(3) the financial crisis has affected substantially the food subsector. The results indicate that H(1) is confirmed, but not totally, H(2) is confirmed and H(3) is rejected. We also found surprisingly good affine fittings between inputs ...
Mounting evidence suggests that average markups in the US economy have been increasing. This column argues that about half of measured aggregate productivity growth over the last 20 years can be accounted for by firms with higher markups increasing their relative size. This implies that the slowdown in pure technology growth is even slower than suggested by aggregate productivity statistics. Eliminating markups would increase the productivity of the US economy by about 40%. Estimates of firm-level markups by De Loecker and Eeckhout (2017), Gutierrez and Philippon (2016), and Gutierrez (2017) show that the average markups in the US economy have been increasing over the last 20 years. This growth in markups has coincided with a slowdown of productivity growth. Are these two trends related, and if so, what are the implications of the secular evolution of markups for productivity? Loosely speaking, aggregate productivity growth measures how much faster output (GDP) is growing relative to the growth in inputs (labour and capital). The business of separating aggregate productivity from input growth is called growth accounting. Traditionally, growth accounting assumes that the economy is perfectly competitive, with no monopoly rents, markups , or other distortions. Under these assumptions, foundational results by Solow (1957) and Hulten (1978) show that aggregate productivity growth is a combination of the technological productivity growth rates of the firms in the economy. It has long been understood that if the economy is not perfectly competitive, then aggregate (or macro) productivity can change for reasons unrelated to technological (or micro) productivity. Intuitively, if the economy is not perfectly competitive, then workers, capital, and intermediate goods are not optimally allocated. Over and above changes in firms' technologies, changes in allocative efficiency also contribute to aggregate productivity growth. In a recent paper (Baqaee and Farhi 2017), we generalise growth accounting beyond the perfectly competitive case, and show how changes in aggregate productivity can be decomposed into two structurally interpretable components: changes in firms' technological productivities, and changes in allocative efficiency. We use this framework to assess the implications of secular changes in markups for aggregate productivity. To conduct our analysis, we use three different measures of markups computed at the firm-level for the US economy using Compustat: the markup series of De Loecker and Eeckhout (2017), Gutierrez and Philippon (2016), as well as markups implied by the operating profit margin (often times called the Lerner index). All three series show that the average markup has been increasing over the last 20 years, and that this increase is happening for all industries. Importantly, all three series show that within industries, the increase in the average markup is primarily due to a composition effect across firms rather than a within-firm effect: markups have increased because high-markup firms have increased their relative size, not because firms have increased their markups. 1 Our results, displayed in Figure 1 for the Gutierez-Philipon (2016) markups , show that this reallocation of market share from low-to high-markup firms has considerably improved the allocative efficiency of the US economy over the last 20 years. In fact, improvements in allocative efficiency account for about 50% of the cumulated growth in aggregate productivity during this
Italy’s Productivity Conundrum. A Study on Resource Misallocation in Italy
2016
This paper provides a detailed analysis of the patterns of misallocation in Italy since the early 1990s. In particular, we show that the extent of misallocation has substantially increased since 1995, and that this increase can account for a large fraction of the Italian productivity slowdown since then. We gather evidence on the evolution of firm level misallocation both within and between various categories of firms, in particular those based on geographic areas, industries, and firm size classes. We do so both for firms in manufacturing and for firms in non-manufacturing. Overall, looking at the distribution of firm productivity, we uncover a thickening of the left tail as the share of firms with low productivity has increased over the period. This implies not only a decrease in average firm productivity, but also an increase in its dispersion. We show that the increase in misallocation has come mainly from higher dispersion of productivities within different firm size classes an...
Recent Trends in Europe's Output and Productivity Growth Performance at the Sector Level, 2002-2015
International Productivity Monitor, 2017
Using the latest release of sector-level growth and productivity data up to 2015 from the EU KLEMS database, evidence is mounting that the global financial crisis (2008/09) and the Euro Area recession (2011/12) have significantly damaged the growth potential of European economies across the board. None of the countries in the 12 EU member states included in the analysis have recovered to growth rates anywhere near to what they were in the decade before the crisis. Slow productivity growth which was already visible in most market services sectors before the crisis has broadened to the goods-producing sector for most European economies since the crisis. The manufacturing sector was particularly hard hit, and has only partially recovered. The dynamics of the global and Euro Area crises and their impact seem still to be in full swing, making it too early to judge whether output and productivity growth rates can still recover to the pre-crises rate or whether growth in Europe will end up...