7 - Productivity and the Labour Market

Summary

We have focused on labour allocation as another factor that helps explain aggregate economic growth through its effects on productivity. The effect of labour misallocation is potentially large in all countries for which we have data. Any policy fostering reallocation of workers needs jobs to churn in the first place. Only if workers lose jobs in unproductive firms can they find alternative occupation in more productive firms. Policies promoting labour reallocation should be accompanied by active labour market policies to reduce the displacement costs of workers, or specific policies aimed at reducing potential wage disparity. Increasing the minimum wage is thus a policy which could have positive reallocation effects for the economy. But if small firms are forced out of business as a result, the same policy might also reduce competition and lead to less choice for consumers.