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A Tale of Two Sectors: Why is Misallocation Higher in Services than in Manufacturing?
Author(s) -
Dias Daniel A.,
Robalo Marques Carlos,
Richmond Christine
Publication year - 2020
Publication title -
review of income and wealth
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.024
H-Index - 57
eISSN - 1475-4991
pISSN - 0034-6586
DOI - 10.1111/roiw.12416
Subject(s) - manufacturing sector , tertiary sector of the economy , economics , productivity , gross output , labour economics , manufacturing , closing (real estate) , aggregate (composite) , service (business) , production (economics) , business , macroeconomics , economy , materials science , marketing , composite material , finance
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 in 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 distributions. We interpret these results as stemming mainly from higher output‐price rigidity, higher labor adjustment costs and higher informality in the service sector.