We analyse the evolution of capital and labour (mis)allocation across firms in five euro-area countries (Belgium, France, Germany, Italy and Spain) and eight main sectors of the economy during the period 2002-2012. Three key stylized facts stand out.
First, in all countries except Germany, capital allocation worsened over time whereas the efficiency of labour reallocation did not change significantly.
Second, the observed increase in capital misallocation has been particularly marked in services compared with industry.
Third, misallocation of both labour and capital decreased in all countries in 2009 and again for some countries/sectors in 2011-2012.
We then take stock of the possible drivers of input misallocation dynamics in a standard panel regression framework. Restrictive bank lending standards and heightened demand uncertainty in certain years led to growth in capital misallocation, whereas since 2002 overall deregulation in both the product and labour markets has helped dampen input misallocation dynamics.
Controlling for all variables, the Great Recession per se improved the allocative efficiency of both capital and labour.
