Overall productivity in Iceland remains high, supported in part by activities related to natural resources. However, productivity growth has slowed over the past two decades, as in many other OECD countries. This study investigates the underlying factors driving aggregate productivity, focusing on within-firm productivity developments and the role of resource allocation in the market. The productivity slowdown is evident in many firms, with the exception of those at the top of the productivity distribution, which is broadly consistent with patterns observed across OECD countries. Significant productivity gaps persist between high- and low-performing firms, particularly in some services sectors, where many low-productivity firms subsist as they are shielded from international competition. The efficiency of resource allocation contributes only modestly to aggregate productivity in many service sectors. Firm exits have a large positive impact on aggregate productivity growth, indicating the presence of numerous low-performing firms that have exited the market.
