Misallocation Before, During and After the Great Recession

This paper assesses resource misallocation dynamics and its impact on aggregate TFP in the French manufacturing sector between 1990 and 2015. I provide an exact decomposition of allocational inefficiency into three components: labor misallocation, capital misallocation, and a third term representing the interplay between both. Misallocation increased substantially between 1997 and 2007, generating a loss in annual TFP growth of roughly 0.8 percentage points. This increase is mainly related to labor misallocation, except at the beginning of the 2000s, when capital misallocation played the leading role. The impact of allocational efficiency during the Great Recession is sizeable: misallocation accounts for roughly 25% of the 2007-2009 decline in TFP and 20% of the improvement observed in the immediate aftermath of the crisis. The main feature behind the rise in misallocation during the crisis is the predominance of the interplay component, which is stable the rest of the time. It suggests that one should pay special attention to mechanisms disrupting both labor and capital markets in the wake of financial crises. Finally, allocational efficiency remains rather constant after 2010: the post-crisis slowdown in productivity growth is therefore even more pronounced for efficient TFP than for observed TFP.