Capital and labor misallocation in the Netherlands

Using firm-level panel data we analyze the misallocation of capital and labor for the Netherlands in the period 2001–2017. We use the dispersion in marginal revenue products of capital and labor to measure the extent of misallocation. Compared to a counterfactual efficient allocation we find that misallocation has had a sizable negative impact on aggregate productivity of around 14 percentage points in the period 2001–2017. Especially capital misallocation has increased over time. Exploiting a panel data error components model we find that capital misallocation has a much more permanent character than labor misallocation. Moreover, it is the permanent component of capital misallocation that has increased over time. Finally, we show that in our sample the measurement of misallocation is largely insensitive to capital adjustment costs and alternative specifications of the production function. The contribution of heterogeneous markups to observed misallocation, however, is non-negligible