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A Tale of Two Sectors: Why is Misallocation Higher in Services than in Manufacturing?
Author:
Daniel A Dias null

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Christine J. Richmond
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Carlos Robalo Marques null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2016: Issue 220
Language:
English
Publication Date:
15 Nov 2016
DOI:
https://doi.org/10.5089/9781475553796.001
ISBN:
9781475553796
ISSN:
1018-5941
Pages:
50
Keywords:
WP; service sector; Misallocation; productivity; firm-level data; structural transformation; Gelbach decomposition; productivity shock; efficiency gain; TFP distribution; factor share; productivity distribution; balance-sheet data; industry classification; industry level; manufacturing sector industry; output price rigidity; ol tne; output wedge; Services sector; Total factor productivity; Manufacturing
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Recent empirical studies document that the level of resource misallocation in the service sector is significantly higher than in the manufacturing sector. We quantify the importance of this difference and study its sources. 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. We interpret these results as stemming mainly from higher output price rigidity, greater labor adjustment costs and more informality in the service sector.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund