Misallocation of labor and capital in Finland’s business sector

Abstract

<p> Misallocation of labor and capital has attracted considerable interest in economics, however, there is little empirical evidence from Finland’s business sector. This project examined misallocation by applying modern methods of economics and statistics to the register data of Statistics Finland on business enterprises in Finland.<br><br>The main results of the study can be summarized as follows: 1) The current allocation of resources is far from optimal from a societal point of view. 2) The efficiency of resource allocation between companies deteriorated during the study period 2000-2018. 3) Misallocation of labor correlates statistically significantly with the characteristics of enterprises such as the age, size, equity-debt ratio, and foreign ownership. 4) The majority of the companies considered operate capital intensively than would be efficient from a societal perspective.<br><br>Based on the results, more efficient allocation of resources to high-productivity firms could significantly increase productivity. Although startups are, on average, more productive than exiting firms, many startups are unable to take advantage of the competitive advantage due to high productivity to expand their operation. On the other hand, the results suggest that the allocation of labor input across firms is less efficient than the allocation of capital, especially for startups and small firms. Increasing labor mobility and wage competition could be practical means to improve the allocation of labor across firms. <br></p>