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January 02, 2018

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Fact Checker

Ireland had clearly lost competitiveness in the period post 2004. Prices and wages were above what was justified by underlying productivity levels. This exacerbated (somewhat) the post-2008 crash as it took a while for externally-facing sectors to take on staff in substantial numbers again, although the process started about 2012.


The Central Bank publishes real effective exchange rates for Ireland (https://www.centralbank.ie/statistics/data-and-analysis/competitiveness-reserves-and-national-debt/harmonised-competitiveness-indicators-for-ireland-(hcis) and they show (depending on your measure) depreciations of anything between 5% and 25% over the last decade - quite pronounced in the context of monetary union membership.

At this point many would argue that Ireland is over-competitive, and the massive growth driven by the external-facing sector since 2012 is clear evidence of this. Most multinationals are not complaining about wage rates in Ireland but 'hard' constraints such as housing and transport infrastructure. In this respect 2018 most resembles Ireland about 2000.

One can make the case that Irish workers probably deserve a little bit more right now, especially given that corporate profitability (from what we can tell) is very high.

The key to doing so is to make sure that wage rises are modest and can be paused when recession hits, as it inevitably will. Wages are sticky downward (but not upward). The tragedy of 2008-2012 - where one in seven jobs were lost but hourly wages didn't fall - should not be repeated.

Michael Taft

Fact Checker - thanks for that. Haven't visited HCIs since the depth of the recession. Like all measurements, they are tools but cannot, of their own, tell a full story. For instance, using EU Ameco's RER, we find that Germany is the most 'uncompetitive' economy compared to other main EU countries. We also find that over the last 30 years Italy was, on average, the most 'competitive'. We also know that Italy has been stuck in long-term stagnation.

Even the CBI's HCI calculations show wide variations depending on the deflator used (consumer, producer or wages).

There is no doubting that the economy ran into deep trouble post 2001. RERs can help us understand but we need other measurements and a lot of analysis. For instance, were wages the cause or the effect of this deteriorating performance - or can we even neatly divide one component into such categories?

Also, I would suggest that if hourly wages fell between 2008 and 2012, the recession/stagnation would have been prolonged. The real tragedy was the continuation of pro-cyclical fiscal policies combined with an inability to 'read' the causes of the downturn and act accordingly.

Fact Checker

Thanks Michael

There are big problems with using REERs for Ireland, particularly the unit labour cost-deflated one. I could write a long essay but I won't. Suffice to say: treat with care and provide a range!

My counterfactual is wages falling 3% between 2008 and 2012 and employment falling 3pp less. Aggregate labour income would have been about the same and this would have been far better from a societal perspective. And it probably would have happened if Ireland had not been in a monetary union via a depreciation and imported inflation.

The lesson of that period is that Ireland is uniquely vulnerable and no longer has the exchange rate mechanism as a policy tool. It is far more prudent to have wages a little lower than where workers would like them going into a crisis than the other way round. Downward nominal wage rigidity is very real.

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