It would be great if the process of economic growth was done properly. For example, it would be great if economic growth benefited all workers, industries, and groups equally, or perhaps there were some additional benefits for low-income groups. But, of course, growth is not a neat process. Technology and tastes evolve over time, so some companies become better, some industries become better, and some places become better. Even if growth is a net positive for the economy over time, some businesses, industries, and places end up worse off.
As it turns out, the ability to withstand these growth disruptions could be one of the U.S. economy's secret weapons. The IMF provides a discussion in Chapter 3 of the April 2024 International Monetary Fund that can be interpreted along the following lines: World economic outlook, “Slowing global medium-term growth: What will it take to turn the tide?”
This chapter deals with slowing productivity growth, Decrease in investment rates; such as a decline in the growth rate of the working-age population in many countries. Here we focus on a specific cause of productivity decline: the misallocation of capital and labor among firms within a sector. More frankly, it's part of the growth process, where successful companies in a given industry expand, and unsuccessful companies in that industry change their ways, or even shrink or disappear. The authors write (footnotes and references to boxes and figures omitted):
This section reveals that increasing misallocation of capital and labor is contributing to the decline in total factor productivity (TFP) growth, and draws lessons for medium-term growth.So-called allocation efficiency Measures the extent to which capital and labor are allocated to the most productive firms in an economy… TFP is a measure of the extent to which capital and labor are allocated to the most productive firms in an economy…because a decrease in allocative efficiency causes resources to be more concentrated in relatively less productive firms over a period of time. growth may decrease. However, if allocation efficiency improves as resources are directed to more productive firms, TFP growth will be boosted. …
The approach used here… found that in a sample of 15 developed and five emerging market countries, allocative efficiency declined in most countries from 2000 to 2019. The median country in the sample saw an average decline in his TFP growth rate of about 0.9 percentage points per year due to lower allocative efficiency. For the median developed economy, this effect was 0.5 percentage points. Given that the median TFP growth in advanced economies was only 0.5% during this period, this suggests that increased misallocation of capital and labor may have halved TFP growth. A notable exception is the United States, where improved allocative efficiency boosted annual TFP growth by 0.8 percentage points over the same period.
This process of reallocation to more productive firms could theoretically occur within a particular sector of the economy or between sectors. The IMF's analysis suggests that sectoral misallocation is important only in a small number of economies undergoing dramatic growth restructuring, such as China. For developed countries, most of the misallocation is within sectors.
Additionally, the larger misallocation goes back to a pattern I've been pointing out here for nearly a decade. This means that within a given sector of the economy, the gap between the productivity leaders in a given industry and other companies in that industry is growing. It is spreading not only in the United States but around the world (e.g. here, here, here, hereand here). The reasons for this change are not entirely clear, but one reason is that some companies have proven better than others at incorporating information technology into all processes. It seems that there is. The IMF authors write:
A large part of the observed decline in allocative efficiency within the sector can be attributed to uneven productivity growth of firms during parts of the period from 2000 to 2019. … (T) The dispersion of real productivity of firms in the 20 sample economies increased significantly prior to the global financial crisis and remains high despite some recovery since then. This coincides with a decline in allocation efficiency, most of which occurred during his first decade of the 2000s. …Ideally, firms with rapidly increasing real productivity should attract capital and labor from slower-growing firms, with marginal revenue products held equal. However, firm-level evidence points to frictions that slow this adjustment process. This leads to lower initial allocative efficiency, as fast-growing firms operate with less capital and labor than optimal. Consistently, sector-level evidence shows that an increase in sector dispersion in a firm's real productivity is accompanied by a decrease in its allocative efficiency.
What factors help companies in some countries adapt? The IMF cites factors such as „market access and competition, trade openness, financial access, and labor market flexibility.“