Allocative efficiency and the productivity slowdown

This paper was produced as part of the BIS Consultative Council for the Americas (CCA) research conference on "Growth, productivity and macro modelling in the Americas", held in Ottawa on 26–27 October 2023.

Summary

Focus

This paper investigates the periods of productivity slowdown in the United States during the 1970s and 2000s. Using a multi-sector model and comprehensive sector-level data, we evaluate the allocative efficiency of capital, labour and intermediate inputs across sectors and their impact on aggregate labour productivity. Our findings indicate that the distribution of resources across sectors is a key factor in explaining these episodes of productivity slowdown, offering new insights into the dynamics of productivity growth.

Contribution

This paper distinguishes itself from previous research by emphasizing allocative efficiency across sectors as the driver behind stagnation in aggregate productivity, rather than focusing solely on fundamental productivity driven by technological advancement. It contributes to the existing literature by highlighting the lack of improvement in allocative efficiency as a key issue. It also identifies the increased volatility in sectoral productivity as a contributing factor to the observed stagnation or deterioration in allocative efficiency during both episodes of productivity slowdown. This shift in focus not only broadens our understanding of the factors contributing to the productivity slowdown but also has important policy implications. 

Findings

The paper outlines three key findings. First, there is a long-term trend of gradual improvement in allocative efficiency from 1960 to 2010. Second, the 1970s and 2000s are exceptions to this trend, with allocative efficiency deteriorating in the 1970s and stagnating in the 2000s. These departures from the long-term trend led to slower-than-normal productivity growth, accounting for approximately two thirds of the productivity growth slowdown. Lastly, the study notes significant variations in the volatility of sectoral productivity across time and sectors, with higher volatility typically associated with reduced allocative efficiency. This observation underscores the importance of lowering volatility in the productivity process to ensure efficient resource allocation, which is essential for enhancing productivity growth.

Abstract

This paper evaluates the contribution of cross-sector allocative efficiency to the productivity slowdown in the US during the 1970s and 2000s. We extend the framework of Oberfield (2013) to derive sufficient statistics for allocative efficiency and decompose aggregate productivity growth in a multi-sector economy with or without input-output linkages. We find approximately two-thirds of the productivity slowdown can be explained by the lack of improvement in allocative efficiency. Furthermore, data shows that increased sector-level volatility is associated with the deterioration of allocative efficiency.

JEL classification: O47, E23

Keywords: productivity slowdown, allocative efficiency, volatility, adjustment costs