1. Growth accounting Recall: Y t = A t K t  L t (1-  ) Take logs: log Y t = log A t +  log K t + (1-  ) log L t Also true for t-1: log Y t-1 = log A t-1 +  log K t-1 + (1-  ) log L t-1

2. Growth accounting (log Y t - log Y t-1 ) = (log A t - log A t-1 ) (log Y t - log Y t-1 ) = (log A t - log A t-1 ) +  (log K t -log K t-1 ) + (1-  )(log L t - log L t-1 ) %  Y t = %  A t +  %  K t + (1-  )%  L t Rearrange to get: %  A t = %  Y t -  %  K t - (1-  )%  L t

3. Growth accounting We have data on Y, K and L (1-  = labour’s share of income (1-  = labour’s share of income = wL/Y  0.6 (on average) Thus   0.4 A is the “Solow” residual

4. Labour input Labour input measured by total hours worked (L) Labour input measured by total hours worked (L) L = average workweek  employment L = average workweek  employment

6. Basic growth accounting YY*K Labor input Labor input* TFPTFP* WWEmpl.WWEmpl. 1960- 73 4.34.60.7-0.50.1-0.5-0.24.34.8 1973- 95 4.14.62.7-0.60.8-0.60.83.23.7 1973- 80 4.64.63.0-1.11.1-1.10.73.64.0 1980- 95 3.94.62.5-0.40.7-0.40.83.03.6 1995- 00 9.410.24.9-1.65.6-1.66.15.25.6 * Business sector

7. Main points: Ireland’s TFP growth slowed between 1973-1995, but picked up post-1995 Ireland’s TFP growth slowed between 1973-1995, but picked up post-1995 Investment also picked up post-1995 Investment also picked up post-1995 Especially impressive boom in employment Especially impressive boom in employment Probably even bigger contribution from labour input if labour quality adjusted. Probably even bigger contribution from labour input if labour quality adjusted.

8. Labour demand Competitive wages (w/A) Competitive wages (w/A) Foreign multinationals using Ireland as an export platform Foreign multinationals using Ireland as an export platform EU internal market EU internal market Low corporation tax Low corporation tax Highly educated, English-speaking workforce Highly educated, English-speaking workforce Flexible labour markets Flexible labour markets IDA policy; agglomeration effects IDA policy; agglomeration effects Expanding services sectors Expanding services sectors Boom in construction industry Boom in construction industry

9. Labour supply Natural demographic effects Natural demographic effects Figures 1, 2 & 3 in Fitz Gerald (2004) Figures 1, 2 & 3 in Fitz Gerald (2004) Low dependency ratio Low dependency ratio Total fertility rate = 2! (EU average = 1.5) Total fertility rate = 2! (EU average = 1.5) Participation rates Participation rates Migration Migration

11. Labour supply National Competitiveness Council, Annual Competitiveness Report 2005 http://www.forfas.ie/ncc/reports/ncc_ann ual_05/ch03/ch03_01.html http://www.forfas.ie/ncc/reports/ncc_ann ual_05/ch03/ch03_01.html http://www.forfas.ie/ncc/reports/ncc_ann ual_05/ch03/ch03_01.html http://www.forfas.ie/ncc/reports/ncc_ann ual_05/ch03/ch03_01.html Central Statistic Office http://www.cso.ie http://www.cso.ie http://www.cso.ie

12. Wedge accounting Ahearne, Kydland, Wynne, (2005) “Ireland’s Great Depression” Ahearne, Kydland, Wynne, (2005) “Ireland’s Great Depression” Ireland experienced a great depression in the 1980s Ireland experienced a great depression in the 1980s Study the contribution of different wedges to the downturn and subsequent recovery Study the contribution of different wedges to the downturn and subsequent recovery

13. Model economy Computer model of the Irish economy Computer model of the Irish economy Explicitly model behaviour of agents Explicitly model behaviour of agents Households make choices about how much to consume/save and how much to work Households make choices about how much to consume/save and how much to work Firms maximize profits Firms maximize profits Agents are forward looking Agents are forward looking

14. “Wedge” accounting Basic idea: Basic idea: Examine movements in wedges or distortions to account for cyclical episodes Examine movements in wedges or distortions to account for cyclical episodes Applications: Applications: Accounting for the (US) Great Depression Accounting for the (US) Great Depression Accounting for 1990-91 (US) recession Accounting for 1990-91 (US) recession

15. Definitions Efficiency wedge Efficiency wedge Essentially TFP Essentially TFP Labor wedge Labor wedge Distorts (intratemporal) labor-consumption decision Distorts (intratemporal) labor-consumption decision Investment wedge Investment wedge Distorts (intertemporal) investment decision Distorts (intertemporal) investment decision Government consumption wedge Government consumption wedge

16. Efficiency wedge A B Nonmarket activity Consumption

17. Labor wedge A B Nonmarket activity Consumption

18. Capital wedge A B Current Consumption Future Consumption

19. Government consumption wedge Unproductive government spending Resource constraint Y t =C t + I t + G t + X t - M t

20. Results Efficiency wedge by itself does a good job accounting for downturn and recovery, though predicts an earlier recovery Efficiency wedge by itself does a good job accounting for downturn and recovery, though predicts an earlier recovery Labour wedge predicts an even more severe downturn, but no recovery Labour wedge predicts an even more severe downturn, but no recovery Investment and government wedges cannot account for downturn and recovery Investment and government wedges cannot account for downturn and recovery

21. Convergence or Regional Boom? Barry (2002) Barry (2002) Rapid growth in 1990s was a regional boom Rapid growth in 1990s was a regional boom Region  very open labour markets Region  very open labour markets If good shock hits region  boom If good shock hits region  boom Ireland’s case: FDI Ireland’s case: FDI Bad shocks can lead to a reversal! Bad shocks can lead to a reversal!