## Diagnosing Iceland’s Productivity Slowdown: Firm-Level Evidence

_Selected Issues Papers, August 7, 2026_

## Source details

**Canonical URL:** [Diagnosing Iceland’s Productivity Slowdown: Firm-Level Evidence](https://www.imf.org/en/publications/selected-issues-papers/issues/2026/08/06/diagnosing-icelands-productivity-slowdown-firm-level-evidence-578632)

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## Bibliographic details
- Authors: Harri Kemp
- Published: August 7, 2026
- Series: Selected Issues Papers
- DOI: https://doi.org/10.5089/9798229055819.018

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### Key findings
- 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.

### Analytical emphasis
- 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.

### Policy recommendations
- 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.

### Subjects and keywords
- 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).*

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_Source: https://www.imf.org/en/publications/selected-issues-papers/issues/2026/08/06/diagnosing-icelands-productivity-slowdown-firm-level-evidence-578632_