Labour reallocation and productivity dynamics: financial causes, real consequences

Claudio Borio, Enisse Kharroubi, Christian Upper and Fabrizio Zampolli

No 534, BIS Working Papers from Bank for International Settlements

Abstract: We investigate the link between credit booms, productivity growth, labour reallocations and financial crises in a sample of over twenty advanced economies and over forty years. We produce two key findings. First, credit booms tend to undermine productivity growth by inducing labour reallocations towards lower productivity growth sectors. A temporarily bloated construction sector stands out as an example. Second, the impact of reallocations that occur during a boom, and during economic expansions more generally, is much larger if a crisis follows. In other words, when economic conditions become more hostile, misallocations beget misallocations. These findings have broader implications: they shed light on the recent secular stagnation debate; they provide an alternative interpretation of hysteresis effects; they highlight the need to incorporate credit developments in the measurement of potential output; and they provide a new perspective on the medium- to long-run impact of monetary policy as well as its ability to fight post-crisis recessions.

Keywords: Labour reallocation; productivity; credit booms; financial crises; hysteresis (search for similar items in EconPapers)
Pages: 39 pages
Date: 2016-01
New Economics Papers: this item is included in nep-eff, nep-fdg, nep-mac and nep-opm
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Citations: View citations in EconPapers (83)

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