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Licensed Unlicensed Requires Authentication Published by De Gruyter August 31, 2020

Sectoral Productivity Gaps and Aggregate Productivity

Rishabh Sinha


The paper examines the aggregate impact of misallocation measured using gaps in labor productivity across sectors. A simple model of resource allocation is used to quantify the effect in which the gaps arise due to distortions in the form of asymmetrical taxes on hiring labor across sectors. From a development accounting approach, the gains from eliminating distortions are meager and are not consequential in accounting for cross-country variation in incomes. Nevertheless, the gains for some countries rival the growth that they have accumulated over several years. Of the 87 countries in the sample, the changes in distortions over time exert a net negative impact in 45 countries instead of providing tailwinds to growth. Changes in distortions account for just under 5.6% of the total growth when aiding growth. In turn, the output drag represents 3.4% of the actual growth on average for the sub-sample in which distortions yield a net negative effect. The move towards allocative efficiency bears a positive association with the quality of institutions.

JEL Classification: O11; O47; O50

Corresponding author: Rishabh Sinha, 1818 H St NW, The World Bank, Washington, DC 20433, USA, E-mail:

Special thanks to three anonymous referees whose comments led to significant improvements. I also thank Joel David, Aart Kraay, Dino Merotto, Todd Schoellman, Luis Servén, and seminar and conference participants at Indian Statistical Institute (Delhi), Midwest Macroeconomics Meetings (Federal Reserve Bank, Kansas City) and NAPW (Quebec City) for their valuable comments and suggestions. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.


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Received: 2019-08-28
Accepted: 2020-06-25
Published Online: 2020-08-31

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