The role of resource misallocation in productivity decreases since the 2007 financial crisis

economics
Credit: CC0 Public Domain

Since the financial crisis of 2007, productivity growth has been slowing in all the major economies for unknown reasons, and in 2016, labor productivity in the U.S. 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, according to a new study by Gianmarco Ottaviano, Professor of Economics at Bocconi University, and colleagues. 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. With 25 years of stagnating , Italy has decades of data available for study. A crucial problem with productivity, the Italian case suggests, is misallocation, the fact that resources don't smoothly flow from less productive to more productive uses. This 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 .

In an ideal, frictionless condition, the ability to generate revenue 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.

Gianmarco Ottaviano, Bocconi University, goes to the roots of the sluggish productivity growth that affects all the major economies. Credit: VAS

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 would have been 18 percent higher than its current level and GDP growth per year would have been 1 percent higher.

The worst-hit firms aren't the usual suspects, but rather 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 are a smoother regulation of firm bankruptcy procedures, the promotion of a more efficient credit market, 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 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 find it hard to fill positions requiring a high level of specific skills with the appropriate candidates.


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More information: Sara Calligaris et al, The Productivity Puzzle and Misallocation: an Italian Perspective, Economic Policy (2018). DOI: 10.1093/epolic/eiy014
Provided by Bocconi University
Citation: The role of resource misallocation in productivity decreases since the 2007 financial crisis (2018, November 12) retrieved 27 May 2019 from https://phys.org/news/2018-11-role-resource-misallocation-productivity-decreases.html
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Nov 12, 2018
The money flows to the fastest returns which is usually also THE LEAST REGULATED. The current favourite is 'grab a granny' and stick her in an overpriced under-provisioned box.
This is likely to stay a favourite as ripping off unproductive granny to pay the rich banks who fund your campaigns will always be popular to those in office.

But as it explains above, 'GRANNY' is so UN-PRODUCTIVE and needs her money shifting for the benefit of 'productive' ME.
This demonstrates that accountancy and politics is warped by chasing money to concentrate it in the hands of the rich and powerful who didn't produce, and socialism is warped to flush money to the others who also haven't created it.
( So Yeah I'm in the middle and not happy.)

Nov 12, 2018
This article does seem an effort to explain away economic declines that have an obvious answer. Government policies can greatly hinder or greatly assist the free market. Said policies hindered the US economy during the Obama years and are now assisting the US economy during the Trump years. Socialist policies are failing everywhere they're tried, capitalist policies are succeeding everywhere they are tried.

Nov 12, 2018
Oh yes, of course. It makes do much sense as the two earlier commentators put it. Rob the poor to enrich the rich. Oh yes, that is a formula for success?

The thing is those deluded fools above have convinced themselves that if they support robbing the poor that they will get to share in the loot...

Sorry boys but all your declaims of loyalty tp the plutocracy is quite unrequited. To the wealthy you and I are, with everyone else, the cattle in their stockyard.

Once fattened up? You will meekly line up in the chute with the rest of us, waiting for the boltgun to your head.

As long as you can pretend that kleptocracy is a viable economic program, you were accepting pf the fraud of the corporate state. Now you are facing the reality that oppression is a metastasizing cancer on a nation and it's people. For that matter, the rest of the Globe and the entire Human Race.

And you don't like it! Tough shit. Welcome to the reality of resource monopoly.

Nov 13, 2018
@rrwillsj It sounds like you belong to the "screw the lot of them" party.
And while I sympathise with your distaste for the rich ripping you off to get richer, and the socialists ripping you off to make everybody poorer: There has to be a better solution than waiting like sheep for the bolt gun.
Voting Trump to rock a politically sick boat may be the least dangerous solution.
And with the mainstream rich-man media using their 'truth' to tell appalling lies all over the world ( supporting their status quo) do you wonder why the most appalling totally fake news is appearing everywhere to counter it.

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