Diagnosing Iceland’s Productivity Slowdown: Firm-Level Evidence

Selected Issues Papers, August 7, 2026

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Iceland maintains one of the highest levels of GDP per capita among advanced economies despite a marked slowdown in productivity growth over the past decade.
Using firm-level data from the IMF RES-ORBIS database, the paper finds the productivity problem is primarily allocative.
Continuing firms record productivity gains, and laggard firms converge rapidly toward the domestic productivity frontier, but these firm-level gains do not translate into stronger aggregate productivity growth.
Four interconnected factors behind the slowdown:
- Weak allocation of labor and capital toward the most productive firms.
- Convergence toward a domestic frontier that remains below the European frontier.
- Declining market selection with rising prevalence of low-productivity “zombie” firms.
- A pervasive productivity penalty associated with firm expansion.

Firm-level analysis based on IMF RES-ORBIS data underpins conclusions about allocative inefficiencies and firm dynamics.
The distinction between firm-level productivity improvements and lack of aggregate translation is central: micro gains exist, but resource misallocation and market structure impede aggregate productivity growth.
The role of domestic frontier positioning relative to the European frontier highlights scope for raising the productivity ceiling, not just catching up domestically.

Strengthen competition to improve market selection and resource allocation.
Improve business dynamism and resource reallocation to direct labor and capital to more productive firms.
Facilitate firm entry and exit to reduce the prevalence of low-productivity “zombie” firms.
Ease scaling constraints to reduce the productivity penalty associated with firm expansion.
Invest in innovation, skills, and infrastructure to help raise productivity growth and support stronger long-term economic performance in Iceland.

Subject: Labor, Labor markets, Labor productivity, Production, Productivity, Total factor productivity
Keywords: allocative efficiency, business dynamism, Europe, firm dynamics, firm scaling, Global, Iceland, IMF staff, Labor markets, Labor productivity, laggard-frontier productivity catch-up, Productivity, productivity frontier, productivity gain, productivity growth, productivity slowdown, resource misallocation, Total factor productivity, zombie firms

Source: Diagnosing Iceland’s Productivity Slowdown: Firm-Level Evidence (IMF).