A new study, “How important is human capital misallocation across sectors for aggregate productivity differences? Evidence beyond Cobb-Douglas,” by Jan Trenczek (Prognos AG) and Konstantin M. Wacker (University of Groningen), reconsiders how much inefficient use of skills across sectors explains income differences between countries. What sets this paper apart is that it moves beyond the traditional Cobb-Douglas production function—a workhorse in economics but one that oversimplifies how sectors and skills interact.

Economists have long worried about misallocation—when workers’ skills are not used where they could be most productive. For example, highly educated workers may be employed in low-productivity sectors, while sectors with greater potential remain short of skilled labor. Past studies typically relied on Cobb-Douglas, which assumes rigid substitution patterns and does not reflect the complexity of real economies.

By introducing a more flexible CES production framework, Trenczek and Wacker offer a more realistic picture. Their findings show that misallocation of human capital explains about 15% of the variation in output per worker across countries—a significant share, but notably lower than the 21% suggested by earlier Cobb-Douglas–based studies.

The takeaway: while skill mismatches across sectors do hinder growth, labor market inefficiency may be a smaller obstacle to global productivity convergence than previously thought. Other factors—like technology, institutions, and investment—also play a decisive role.

This research adds nuance to the global debate on productivity gaps and highlights the importance of using richer economic frameworks to capture how talent is put to work.

Access the paper: This research is publicly available via the GGDC Research Memorandum Series and the GGDC Dataverse Repository. DOI: 10.34894/K0OUUL