Back to search

SAMØKONOMI-Makroøkonomiske utfordringer

Economic crisis and the allocation of capital and labour

Alternative title: Økonomiske kriser og fordelingen av kapital og arbeidskraft

Awarded: NOK 12.0 mill.

Project Number:

326000

Application Type:

Project Period:

2021 - 2026

Location:

Productivity growth, raising the output per worker, is key to improve a country’s standard of living. For much of the 2000s, advanced economies have experienced a slowdown in productivity growth. The question now is whether the covid-19 pandemic restarts productivity growth. Moving capital and labour to strong firms and sectors that will use these factors efficiently is good for productivity growth. The pandemic involved large negative shocks to many firms and sectors, but policy measures from governments may have helped weaker firms to survive. This may have prevented reallocations of capital and labour that could have boosted the economy, but it may also have saved some firms that are productive in normal times from extinction. The first objective of the project is to investigate the importance of misallocation of capital and labour for productivity in several western economies. We will shed light on frictions hindering capital and labour moving across firms, sectors, and regions. To isolate key drivers, we will take advantage of episodes of local shocks and structural change triggered by international markets, natural resource discoveries and public spending. We will also study the roles of bankruptcies, plant closures, the degree of competition in the labour market, and the allocation of talent. The second objective of the project is to study the effects of government interventions in the times of crisis on the use of capital and labour in the economy. We will study interventions such as tax changes, loan guarantee programs and cash transfers.

Advanced economies have experienced a slowdown in productivity growth since the early 2000s, and it has been particularly stark since the financial crisis. The recent covid-19 crisis could increase productivity growth by igniting reallocations of labour and capital, or it could prolong the period of low productivity growth. The answer depends on economies' flexibility in moving capital and labour across firms and sectors as well as on the actions of governments. The objective of this project is twofold. First, we will provide estimates of the importance of misallocation of capital and labour for productivity in several western economies and point to key mechanisms. We will obtain estimates of the extent of frictions hindering capital and labour moving across firms, sectors and regions. To this end, we will take advantage of episodes of local shocks and structural change triggered by changes in international markets, natural resource discoveries and public spending. We will study aspects of modern market economies that are key for an efficient allocation of capital and labour, namely bankruptcies or plant closure, the degree of competition in the labour market and the allocation of talent. Second, we will identify effects of public policy measures implemented in the times of crisis on the reallocation of capital and labour. The question is whether these improve or worsen the factor allocations. We will study several tax changes seen under the financial crisis and the covid-19 crisis, where firms were allowed to shift their tax bill over time. We will also investigate effects of cash transfer program to firms and the loan guarantee program to firms implemented during the covid-19 crisis. The project seeks to move the international frontier and build a strong research environment in Norway.

Activity:

SAMØKONOMI-Makroøkonomiske utfordringer