What price recovery Irish Competitiveness

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What price recovery?Irish Competitiveness

• John FitzGerald
• The Economc and Social Research Institute
• www.esri.ie

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Introduction

• Competitiveness?
• Price to clear the labour market
• A model of the labour market and the economy
• Recent History crowding out
• Seriously damaged tradable sector
• Behaviour of the economy labour market
• A return to full employment?
• Potential output and future growth
• Policy

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Crowding Out

• 2000 economy needed a real appreciation
• Blanchard Ireland Spain
• Real appreciation fixed exchange rate?
• Housing building bubble
• Crowds out tradable sector
• Blanchard balance of payments can matter
• Bubble burst
• Contraction of building sector different from UK
  US
• Need to now expand the tradable sector

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Housing Investment
Source CSO and Eurostat national accounts
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Crowding Out
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Labour Market

• Market clearing in long run
• Elasticity of labour demand
• Elasticity of labour supply
• Female labour supply response
• More elastic than male response
• Migration
• What drives it?
• Changed from the 1980s
• Clearing the labour market

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Model of Migration

• Traditional equation
• For migration to be zero
• Irish wage rates were set abroad infinitely
  elastic supply of labour at that price

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Infinitely elastic labour supply
wiwut
S2
S1
wiwu
D1
L1
L2
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Implications for Wages

• Wages are set on the market
• Not a policy variable, but can be influenced
• Previously - wage rates set abroad
• Infinitely elastic labour supply
• All of incidence of labour taxation on business
• Changes in labour market in 1990s
• Wages set to eventually clear the market
• Change in slope of labour supply
• Less elastic
• Costs of housing, infrastructure etc.

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Open economy wage equation
Implied Labour Supply and Labour Demand
Elasticities
Note Latest estimates taken from full HERMES
model
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Implications for Economy

• Changed labour market behaviour effects
• Crowding out wages rise with rise in demand
• Tax incidence some falls on employees
• Re-enter the Philips curve
• 2009-2011
• Implies fall in nominal wages of 7
• Uncertainty about falls in nominal wages
• Speed of adjustment?
• Approach full employment post 2015

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Restoring Full Employment

• Those losing jobs unskilled building
• Low elasticity of substitution between skilled
  and unskilled labour
• Change in relative wages not a solution
• Will there be enough unskilled jobs?
• Needs a high growth rate to raise demand or.
• Change the supply?
• School leavers
• Training education?
• Replacement rate?

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Unemployment Rate
Source CSO Labour Force Survey and QNHS, special
tabulation
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Supply of Labour
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Relative Wage Rates
Source ESRI databank
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Replacement Unskilled Unemployment Rates
Source ESRI databank
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Recovery

• Depends on world recovery
• Improving competitiveness will speed it
• However, permanent loss of output
• Maybe 10 below where might have been
• Growth in potential output affected now 3
• The economy will look different in 2015
• Implications for employment

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Trend GDP per capita Finland
Source Wim Suyker, Netherlands Central Planning
Bureau
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Trend GDP per capita Sweden
Source Wim Suyker, Netherlands Central Planning
Bureau
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GNP per capita
Source Bergin, Conefrey, FitzGerald and Kearney,
2009
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Output Gap Actual/Potential Output
Source Bergin, Conefrey, FitzGerald and Kearney,
2009
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Conclusions

• Use fiscal policy to prevent bubbles
• Ireland should have run a surplus - Finland
• Festina no Festina lente!
• Implement 2010 budget as planned
• After 2010 less draconian policy possible
• Speed the working of the labour market?
• Partnership agreement?
• Choose taxes with least impact on wages
• Enhance competition
• Deflation anchored by long chain to the Euro
• Labour market interventions to prepare recovery

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References

• Bergin, A., Conefrey, T., Fitz Gerald, J. and I.
  Kearney, 2009, Recovery Scenarios for Ireland
  ESRI Research Series 7
• References on HERMES and the behaviour of the
  Irish economy
• Bergin, A., Conefrey, T., Fitz Gerald, J. and I.
  Kearney, 2009, The Behaviour of the Irish
  Economy Insights from the HERMES Macro-Economic
  Model ESRI Working Paper 287
• Incidence of taxation
• Conefrey, T., FitzGerald, J., Malaguzzi Valeri,
  L. and Tol, R., 2008, The Impact of a Carbon
  Tax on Economic Growth and Carbon Dioxide
  Emissions in Ireland, ESRI Working Paper 251
• Labour market behaviour
• Fitz Gerald, John ed., 2008, Medium-Term Review
  2008-2015, pp. 27-35
• Blanchard, O., 2001, Country adjustments within
  the euro area lessons after two years. In
  Defining a Macroeconomic Framework for the Euro
  Area, CEPR.
• Blanchard, O., 2007, Current account deficits in
  rich countries, NBER working paper no. 12925