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A Tale of Two Sectors; Why is Misallocation Higher in Services than in Manufacturing?

Daniel Dias (), Christine Richmond () and Carlos Marques ()

No 16/220, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: Econometric models; Labor markets; Manufacturing sector; Portugal; Portugal; Productivity; Developed countries; Capital; Services; Total factor productivity; Misallocation, firm-level data, structural transformation, Gelbach decomposition, Macroeconomic Analyses of Economic Development, One, Two, and Multisector Growth Models (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eff and nep-tid
Date: 2016-11-15
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Working Paper: A Tale of Two Sectors: Why is Misallocation Higher in Services than in Manufacturing? (2018) Downloads
Working Paper: A tale of two sectors: why is misallocation higher in services than in manufacturing? (2016) Downloads
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