| Abstract | Measurement of the welfare loss due to resources misallocation can serve as direct evidences that inputs market is distorted. In this paper, welfare loss due to resources misallocation is defined as the gap of actual output and potential output under Pareto optimal allocation, namely output gap. Based on micro firm level data of Chinese manufacturing industries over the period 1998-2007, we show the existence of labor misallocation, and then calculate the welfare loss aroused by labor misallocation. Results indicate that, labor inputs are misallocated within and between two-digit industries, but this varies from industry to industry. For the whole manufacturing industry, averagely, one unit move in the correct direction for labor inputs would increase output by 12041 to 13426 Yuan per firm. During the research period, the revenue of marginal product of labor grows faster than that of wage rates, which means the distorted labor allocation is getting worse. The results have profound implications on the optimization of resources between and within industries, and on the construction of free resource market. |