Efficient Labor Reallocation and Productivity Growth

Abstract

Differences in income across countries are largely accounted for by productivity variations. The overall productivity growth is attributed to both the productive efficiency of individual firms or industries and the al-locative efficiency between them. The former relates to innovation and technological catch-up to the frontier technology of advanced countries, while the latter is associated with reallocation of factors of production from less productive sectors to higher productive sectors and improving within-sector allocative efficiency of production resources between firms. One of the well-established argument on productivity is that differences in the allocative efficiency account for a large fraction of variations in productivity across countries. That is, alleviating distortions in resource allocation can improve productivity even if there is no technological im-provement.