Productivity growth is slowing down among OECD countries, coupled with increased misallocation of resources. A recent strand of literature focuses on the role of non-viable firms (“zombie firms”) to explain these developments. Using a rich firm-level dataset for one of the OECD countries with the largest drop in barriers to firm exit and restructure, we assess the role of zombies on firm dynamics, both in the extensive and intensive margins. We confirm the results on the high prevalence of zombie firms, significantly less productive than their healthy counterparts and thus dragging aggregate productivity down. Moreover, while we find evidence of positive selection within zombies, with the most productive restructuring and the least productive exiting, we also show that the zombies' productivity threshold for exit is much lower than that of nonzombies, allowing them to stay in the market, distorting competition and sinking resources. Zombie prevalence curbs the growth of viable firms, in particular the most productive, harming the intra-sectoral resource reallocation. We show that a reduction in exit and restructuring barriers promotes a more effective exit channel and fosters the restructuring of the most productive. These results highlight the role of public policy in addressing zombies' prevalence, fostering a more efficient resource allocation and enabling productivity growth.