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A Tale of Two Sectors

Why is Misallocation Higher in Services than in Manufacturing?

A Tale of Two Sectors by Daniel A Dias
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Recent empirical studies document that the level of resource misallocation in theservice sector is significantly higher than in the manufacturing sector. We quantify theimportance of this difference and study its sources. Conservative estimates for Portugal(2008) show that closing this gap, by reducing misallocation in the service sector tomanufacturing levels, would boost aggregate gross output by around 12 percent andaggregate value added by around 31 percent. Differences in the effect and size ofproductivity shocks explain most of the gap in misallocation between manufacturingand services, while the remainder is explained by differences in firm productivity andage distribution. We interpret these results as stemming mainly from higher output pricerigidity, greater labor adjustment costs and more informality in the service sector.
International Monetary Fund; November 2016
50 pages; ISBN 9781475554069
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Title: A Tale of Two Sectors
Author: Daniel A Dias; Christine J. Richmond; Carlos Robalo Marques