Allocative Efficiency and the Productivity Slowdown

Last updated: July 2023

This paper evaluates the contribution of cross-sector allocative efficiency to the productivity slowdown in the US during the 1970s and 2000s. We extend the framework of Oberfield (2013) to derive sufficient statistics for allocative efficiency and decompose aggregate productivity growth in a multi-sector economy with or without input-output linkages. We find that approximately two-thirds of the productivity slowdown can be explained by the lack of improvement in allocative efficiency. Furthermore, data shows that increased sector-level volatility is associated with the deterioration of allocative efficiency.