Misallocation Of Labor Research Articles

Asymmetries in the euro area and TFP growth: evidence from three major European economies

PurposeIn this paper, the authors study the long-run determinants of total factor productivity (TFP) in three major European economies over the period 1983–2017, namely Germany, France and Italy.Design/methodology/approachThe authors focus on the capital misallocation effects, scale effects and labor misallocation effects. To this end, the authors study how real interest rate shocks, real exchange rate shocks, real wage shocks and changes in labor regulation affected TFP in major European countries over the last decades. The authors employ a theoretical and an empirical model to investigate the issue. The empirical results are obtained using a VAR model for estimation.FindingsA stripped-down model of labor market in open economy with technology progress allows to identify the relevant variables affecting TFP. On the empirical ground, the authors find a positive relationship between TFP and real interest rate in the long run. Importantly, the authors detect a positive relationship between TFP and real exchange rate. Further, the authors show that the TFP can respond positively to a stricter labor market regulation and to a higher real compensation per employee. The results provide support to the idea that TFP has a positive relation with prices in the long run, while it may be biased along the cycle because of price rigidity.Research limitations/implicationsThe present model is stylized and may not capture all of the details of reality. The analysis should be extended to a larger number of countries. Technology progress could be proxied using different variables, as the R&D expenditure or the number of patents. Micro data, for specific sectors and industries, can improve the quality of the empirical investigation.Practical implicationsMainly the authors find that TFP has a positive relationship with price changes in the long run, while it may be biased along the cycle because of price stickiness. Capital misallocation and labor misallocation can negatively affect TFP. Thus, the observed divergences in European TFP can be traced back to the misallocation effects attributable to the decrease of real interest rate and real wages, together with the raising labor flexibility. Mainly, the authors detect a positive long-run relationship between TFP and real exchange rate. This outcome strengthens the supply-side view of the relationship between productivity and real exchange rate.Social implicationsThe authors believe that the present setup can be helpful to reflect critically on the nodes at the core of the productivity slowdown and asymmetries in the eurozone. The aim is to implement renewed policies in order to favor economic growth, convergence and stability in the euro area.Originality/valueThis research addresses the issue of asymmetries among European economies by focusing on the role played by real prices in the long run. Traditionally, the dynamics of TFP have been attributed only to technological components, human capital and knowledge. This work shows that the dynamics of prices such as the real interest rate, the real exchange rate and the real wage can also influence the technological process by pushing the production system toward choices that are not always optimal for economic growth. An interesting result of this research concerns the positive relationship between real exchange rates and TFP in the long term, evidence of an important supply-side effect on the technological process.

The causes and economic consequences of rising regional housing prices in New Zealand

This paper explores the causes and economic consequences of recent increases and divergences in regional house prices in New Zealand. It identifies large and increasing ‘wedges’ between house prices and underlying supply costs. These house price distortions arise from the collision of rising demand for housing with housing supply constraints, including zoning rules that limit new subdivision and redevelopment of existing sites. Regions with larger starting price distortions appear to have experienced larger increases in house prices and rents in response to migration shocks. This results in large economic costs due to misallocation of labour away from high-productivity regions in New Zealand and increased net migration to Australia. A calibrated spatial equilibrium model is used to investigate what would have happened if house price distortions had increased at a slower rate in recent decades due to relaxation of supply constraints. This model implies that comprehensively removing constraints to housing supply would have increased New Zealand’s total economic output by up to 8.4%, increased per-worker output by 0.9%, and eliminated recent net migration outflows to Australia. More plausible counterfactual scenarios would result in smaller, but still economically meaningful, gains on the order of one to five percent of gross domestic product.

How do resource misallocation and government corruption affect green total factor energy efficiency? Evidence from China

At present, China is undergoing industrial restructuring. However, the resource misallocation problem in China is still serious, which may affect China's green total factor energy efficiency (GTFEE). Based on previous studies, misallocation may be exacerbated by corruption, which would further inhibit GTFEE. In this study, we utilize the provincial panel data of 30 provinces in China from 2005 to 2016 to investigate the relationship between misallocation, corruption and GTFEE by employing appropriate spatial econometric methods and panel threshold model. The results indicate that there is spatial dependence in GTFEE. Local GTFEE is negative impacted by labor misallocation, while it is not affected by labor misallocation in the neighboring area. There is also evidence that capital misallocation in the local area is negatively correlated with GTFEE, although not statistically significant; while the capital misallocation in the neighboring area has significant negative correlation with local GTFEE. The results also indicate that GTFEE is not significant affected by corruption. It is also found that local corruption would aggravate the inhibiting effect of labor resource misallocation on GTFEE, while the inhibiting effect of capital resource misallocation on GTFEE would not be affected by local government corruption.

The gross output agricultural productivity gap

In developing countries the agricultural productivity gap, namely the ratio of labor productivity in non-agriculture to that in agriculture, is much larger if measured by gross output than by value-added. This implies more serious sectoral labor misallocation in these countries.

Effects of Land Finance on Resource Misallocation in Chinese Cities during 2003–2017: A Dynamic Panel Econometric Analysis

Based on the review of previous studies and the analysis of the dynamic changes of misallocation of capital and labour in China during 2003–2017, this study has adopted the Dynamic Panel Econometric Model to investigate the effects of land finance on resource misallocation at national, regional, and urban tier levels. The results show that resource misallocation has a significant feature of temporal dependence, while the misallocations of capital and labour in China have experienced different dynamic changes during the investigation period. In addition, land finance has aggravated resource misallocation at the national level, while spatial heterogeneity is established at regional and urban tier levels, which deserves much more attention in further studies. The conclusions will not only provide a relatively scientific and accurate reference for the effective allocation of production factors but also be conducive to the coordinated and sustainable development of China’s economy in the long run.

World Productivity: 1996-2014

We account for the sources of world productivity growth, using data for more than 36 industries and 40 major economies from 1996 to 2014, explicitly taking into account changes in the misallocation of resources in labor, capital, and product markets. Productivity growth in advanced economies slowed but emerging markets grew more quickly which kept global productivity growth relatively constant until around 2010. After that, productivity growth in all major regions slowed. Much of the volatility in world productivity growth reflects shifts in the misallocation of labor across countries and industries. Using new data on PPP-based value-added measures by country and industry, we show that about a third of these shifts is due to employment growing in countries, most notably China and India, that benefit from an international cost advantage. Markups are large and rising and impact the imputed misalloction of capital. However, they have little effect on the country-industry technology contribution to global productivity.

Why Is Current Unemployment So Low?

We account for the sources of world productivity growth, using data for more than 36 industries and 40 major economies from 1996 to 2014, explicitly taking into account changes in the misallocation of resources in labor, capital, and product markets. Productivity growth in advanced economies slowed but emerging markets grew more quickly which kept global productivity growth relatively constant until around 2010. After that, productivity growth in all major regions slowed. Much of the volatility in world productivity growth reflects shifts in the misallocation of labor across countries and industries. Using new data on PPP-based value-added measures by country and industry, we show that about a third of these shifts is due to employment growing in countries, most notably China and India, that benefit from an international cost advantage. Markups are large and rising and impact the imputed misallocation of capital. However, they have little effect on the country-industry technology contribution to global productivity.

Can commuting facilitation relieve spatial misallocation of labor?

Migration barriers often lead to the spatial misallocation of labor across cities. Commuting facilitation is expected as the effective way to relieve labor spatial misallocation. This paper uses China's high-speed rail (HSR) network project as a source of exogeneous variation in commuting facilitation to examine its impact on labor spatial misallocation across cities. Results show that commuting facilitation plays a role in relieving labor spatial misallocation. The degree of labor spatial misallocation decreases by 5.2 percent when cities are directly connected by HSR. Market potential serves as the key mechanism for HSR network to reduce spatial misallocation. By the relief of spatial misallocation, HSR network increases the aggregate labor productivity and employment of the HSR-connected cities. However, the distributional effects of HSR network generate different impacts on core and peripheral cities. In particular, HSR network displaces the employment of skill-intensive sectors from periphery to core, and meantime promotes the employment creation of labor-intensive sectors in the periphery. Despite siphon effect, HSR network improves the labor productivity of both core and periphery. We consequently argue that siphon effect derived from commuting facilitation is not always harmful, and it could also be a driver to relieve misallocation.In addition, the effect of HSR on spatial misallocation increases with the improvement of HSR services quality, and weakens with the difficulty of labor in relocation.

How Housing Price Fluctuation Affects Resource Allocation: Evidence from China

ABSTRACT A large number of recent proofs indicate the irrationality of optimal resource allocation assumption in traditional economic growth theory, wherein resource misallocation (misallocation of capital and labor among heterogeneous enterprises) is regarded as the important reason for the difference in total factor productivity (TFP). In this article, we study resource allocation from the perspective of housing price, and measure the resource allocation efficiency of industrial enterprises in China based on industrial enterprises database covering the period of 1999–2007. We find that to some extent rising housing price has ameliorated resource allocation efficiency in China recently. We further find that rising housing price ameliorates resource allocation mainly in Central and Western areas and in labor-intensive industries.

Market segmentation, resource misallocation and environmental pollution

Based on a review of previous literature and an investigation of the empirical facts of market segmentation and environmental pollution in China, this study mainly analyses the impact of market segmentation on environmental pollution from the perspective of resource misallocation. The results generated by the Dynamic Panel Econometric Model show that market segmentation had a significant deteriorating effect on environmental pollution during the investigated period. In addition, market segmentation has significantly aggravated the misallocation of labour and capital resources, which is also an important factor leading to environmental pollution. As for the heterogeneity of different pollutants, market segmentation has a significant negative impact on sulpfur dioxide (SO2), smoke and dust, suspended particles (PM2.5), while for wastewater and solid waste, the impact is not significant. Furthermore, the effect of market segmentation on environmental pollution was significant in the period 2002–2007, and in the Eastern area, the impact was not significant due to the relatively high degree of market integration. The conclusions will provide a reference for optimizing the relationship between local governments, and improving the environmental quality of China.

Measuring Trends and Persistence in Capital and Labor Misallocation

We analyze trends and persistence in the misallocation of labor and capital using firm-level panel data for the Netherlands in the period 2001-2017. We use the dispersion in marginal revenue products of labor and capital to measure the extent of misallocation. Compared to a counterfactual efficient allocation we find that misallocation has had a sizable negative impact on aggregate productivity. Especially capital misallocation has increased over time. The relatively high and rising capital misallocation is caused by a combination of small, highly productive firms facing relatively high capital wedges and large and unproductive firms facing relatively low capital wedges. Exploiting a panel data error components model we find that capital misallocation has a much more permanent character than labor misallocation. Moreover, it is the permanent component of capital misallocation that has increased over time. Finally, we show that in our sample the measurement of misallocation is largely insensitive to capital adjustment costs and alternative specifications of the production function. The contribution of heterogeneous markups to observed misallocation, however, is non-negligible.

Habit Formation and the Misallocation of Labor: Evidence from Forced Migrations

We examine the long-term effects of resettling 11% of the Finnish population during World War II. Entire rural communities were moved to locations that resembled the origin areas and displaced farmers were given farms similar to those they had lost. Despite this policy of reconstructing the pre-war situation, we find that forced migration increased the likelihood of leaving agriculture, which in turn led to a large increase in long-term income among the displaced rural population. By contrast, being displaced decreased the income of the resettled urban population. We examine the extent to which these effects can be explained by the impact of forced migration on farm quality, education, networks, learning, and discrimination, but find only limited support for the relevance of these mechanisms. Instead, we argue that a Roy model augmented with habit formation for residential location provides the most compelling rationalization for these results.

Measuring the Spatial Misallocation of Labor: The Returns to India-Gulf Guest Work in a Natural Experiment

'Guest workers' earn higher wages overseas on temporary low-skill employment visas. This wage effect can quantify global inefficiencies in the pure spatial allocation of labor between poorer and richer countries. But rigorous estimates are rare, complicated by migrant self-selection. This paper tests the effects of guest work on Indian applicants to a construction job in the United Arab Emirates, where a crisis exogenously influenced job placement. Guest work raised the return to labor by a factor of four, implying large spatial inefficiency. Short-term effects on households were modest. Effects on information, debt, and later migration were incompatible with systematic fraud.

Aggregate productivity losses from factor misallocation across Chinese manufacturing firms

Aggregate productivity can be largely determined by how efficiently production factors are allocated across heterogeneous establishments. This paper estimates aggregate productivity losses from factor misallocation using a large sample of Chinese manufacturing firms. We analyze the institutional background and provide some stylized facts on factor misallocation of capital and labor in China. Using an approximation method based on the estimation of input gaps, we find that aggregate productivity losses reach an average rate of 11.18 percentage points per year. On average, capital and labor misallocation account for 6.73 and 4.45 percentage points, respectively. State ownership plays an important role in generating factor misallocation and productivity losses. Our results imply that factor misallocation have become a major obstacle preventing China from moving to a more efficient economy.

Misallocation and the Credit Cycle: Evidence from Europe

Using a large firm level dataset, that covers 18 European countries in the 2006-2014 period, I develop an empirical approach in the spirit of Rajan and Zingales (1998) in order to study whether and to what extent the credit cycle influences the efficient allocation of resources across firms. I document that a higher availability of credit leads to a decline in both capital and labor misallocation, suggesting that, when credit is above its trend, the additional funds flowing in the economy reduce financial frictions, allowing financially constrained but productive firms to implement their projects. The estimated effect explains 7.8% and 5.8% of the variation in the within-sector dispersion in the marginal revenue products of capital and labor respectively, and it is consistent with respect to a wide range of robustness checks. It is larger when evaluating exclusively the manufacturing industry or countries with relatively small domestic credit markets, while tends to disappear for financially developed economies.

The Empirical Study of House-price Fluctuations on the Impact of Total Factor Productivity of Manufacturing in China—Based on the Perspective of Misallocation of Resources

The paper establishes theoretical and empirical model that measured and analyzed the impact of distortions of factor price, caused by irrational prosperity of China’s real estate, on misallocation of capital, labor and distortion of overall TFP in manufacturing enterprises during the periods of 2007 to 2016. The main conclusions obtained are at followings: 1) Manufacturing enterprises had significant and varying degree of distortions of capital, labor and overall TFP on three levels of national overall, different regions and ownership systems; 2) Rising real estate prices could obviously cause misallocation of resources and reduce the growth rate of TFP in manufacturing; 3) If the misallocation of resources were eliminated, the TFP would receive a highly increase of 20%-30%. The degree of influence of the virtual economy on the real economy is exactly what China and the countries with related problems need to study in depth. This study will make up the gaps in this research.

Firing the wrong workers: Financing constraints and labor misallocation

Firms consider wages, current and expected productivity, as well as firing and hiring costs when firing a worker. Financing constraints distort this intertemporal trade-off, leading firms to sub-optimally fire short-tenured workers with high future expected productivity. We provide empirical evidence of this distortion using matched employer-employee data from the Swedish population between 2000 and 2010. We propose a new empirical strategy that uses credit ratings to identify financing constraints and uses exchange rates and trade data to identify demand shocks. Our empirical results identify an important new misallocation effect of financial frictions that operates within firms across different types of workers.

The Empirical Dynamics of Misallocation

Factor misallocation has been emphasized as one of the main sources of differences in aggregate TFP. This paper investigates the empirical dynamics of both capital and labor misallocation. Exploiting a balanced firm-level panel dataset covering manufacturing and services industries in several European countries, the analysis relies on the combination of three well-known and complementary econometric approaches: the (conditional) beta-convergence framework of Barro and Sala-i-Martin (1991, 1992), sigma-convergence, and the distribution dynamics methodology developed by Quah (1993a, 1996). Even though beta-convergence in both inputs allocative efficiency holds conditionally as well as unconditionally, and is consistent to a wide range of robustness checks, full distribution convergence in terms of capital misallocation does not occur at all and it proceeds at a low pace with respect to labor misallocation.

Labor Misallocation and Mass Mobilization: Russian Agriculture during the Great War

We exploit a quasi-natural experiment of military draftees in Russia during World War I to examine the effects of a massive, negative labor shock on agricultural production. Employing a novel distr...

Predation, Protection, and Productivity: A Firm-Level Perspective

This paper studies the consequences of predation when firms deploy guard labor as a means of protecting themselves. We build a simple model and combine it with data for 144 countries from the World Bank enterprise surveys, which ask about firm-level experiences with predation and spending on protection. We use the model to estimate the output loss caused by the misallocation of labor across firms and from production to protection. The loss due to protection effort is substantial and patterns of state protection at the micro level can have a profound impact on aggregate output losses. Various extensions are discussed. (JEL D22, D24, J24, K40, L84, O17)