Labour Reallocation and Productivity Dynamics: Financial Causes, Real Consequences

39 Pages Posted: 6 Jan 2016

See all articles by Claudio E. V. Borio

Claudio E. V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis

Enisse Kharroubi

Bank for International Settlements (BIS)

Christian Upper

Bank for International Settlements (BIS)

Fabrizio Zampolli

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: January 2016

Abstract

We investigate the link between credit booms, productivity growth, labour reallocations and financial crises in a sample of over twenty advanced economies and over forty years. We produce two key findings. First, credit booms tend to undermine productivity growth by inducing labour reallocations towards lower productivity growth sectors. A temporarily bloated construction sector stands out as an example. Second, the impact of reallocations that occur during a boom, and during economic expansions more generally, is much larger if a crisis follows. In other words, when economic conditions become more hostile, misallocations beget misallocations. These findings have broader implications: they shed light on the recent secular stagnation debate; they provide an alternative interpretation of hysteresis effects; they highlight the need to incorporate credit developments in the measurement of potential output; and they provide a new perspective on the medium- to long-run impact of monetary policy as well as its ability to fight post-crisis recessions.

Keywords: Labour reallocation, productivity, credit booms, financial crises, hysteresis

JEL Classification: E24, E51, O47

Suggested Citation

Borio, Claudio E.V. and Kharroubi, Enisse and Upper, Christian and Zampolli, Fabrizio, Labour Reallocation and Productivity Dynamics: Financial Causes, Real Consequences (January 2016). BIS Working Paper No. 534, Available at SSRN: https://ssrn.com/abstract=2711258

Claudio E.V. Borio (Contact Author)

Bank for International Settlements (BIS) - Research and Policy Analysis ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Enisse Kharroubi

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Christian Upper

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Fabrizio Zampolli

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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