Transcript Efficiency wedge A B Nonmarket activity Consumption Labor wedge

Growth accounting
Recall:
Yt = At Kta Lt (1-a)
Take logs:
log Yt = log At + a log Kt + (1-a) log Lt
Also true for t-1:
log Yt-1 = log At-1 + a log Kt-1 + (1-a) log Lt-1
Growth accounting
(log Yt - log Yt-1) = (log At - log At-1)
+ a (log Kt -log Kt-1)
+ (1-a)(log Lt - log Lt-1)
% Yt = % At + a % Kt + (1-a)% Lt
Rearrange to get:
% At = % Yt - a % Kt - (1-a)% Lt
Growth accounting
We have data on Y, K and L
(1-a)
= labour’s share of income
= wL/Y
 0.6 (on average)
Thus a  0.4
A is the “Solow” residual
Labour input
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Labour input measured by total hours
worked (L)
L = average workweek  employment
Basic growth accounting
Y
Y*
K
Labor input
Labor input*
WW
Empl.
WW
Empl.
TFP TFP*
196073
4.3
4.6
0.7
-0.5
0.1
-0.5
-0.2
4.3
4.8
197395
4.1
4.6
2.7
-0.6
0.8
-0.6
0.8
3.2
3.7
197380
4.6
4.6
3.0
-1.1
1.1
-1.1
0.7
3.6
4.0
198095
3.9
4.6
2.5
-0.4
0.7
-0.4
0.8
3.0
3.6
199500
9.4
10.2
4.9
-1.6
5.6
-1.6
6.1
5.2
5.6
* Business sector
Main points:
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Ireland’s TFP growth slowed between
1973-1995, but picked up post-1995
Investment also picked up post-1995
Especially impressive boom in employment
Probably even bigger contribution from
labour input if labour quality adjusted.
Labour demand
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Competitive wages (w/A)
Foreign multinationals using Ireland as an
export platform
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EU internal market
Low corporation tax
Highly educated, English-speaking workforce
Flexible labour markets
IDA policy; agglomeration effects
Expanding services sectors
Boom in construction industry
Labour supply
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Natural demographic effects
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Figures 1, 2 & 3 in Fitz Gerald (2004)
Low dependency ratio
Total fertility rate = 2! (EU average = 1.5)
Participation rates
Migration
Labour supply
National Competitiveness Council, Annual
Competitiveness Report 2005
 http://www.forfas.ie/ncc/reports/ncc_annu
al_05/ch03/ch03_01.html
Central Statistic Office
 http://www.cso.ie
Wedge accounting
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Ahearne, Kydland, Wynne, (2005)
“Ireland’s Great Depression”
Ireland experienced a great depression in
the 1980s
Study the contribution of different wedges
to the downturn and subsequent recovery
Model economy
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Computer model of the Irish economy
Explicitly model behaviour of agents
Households make choices about how
much to consume/save and how much to
work
Firms maximize profits
Agents are forward looking
“Wedge” accounting
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Basic idea:
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Examine movements in wedges or distortions
to account for cyclical episodes
Applications:
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Accounting for the (US) Great Depression
Accounting for 1990-91 (US) recession
Definitions
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Efficiency wedge
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Labor wedge
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Distorts (intratemporal) labor-consumption
decision
Investment wedge
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Essentially TFP
Distorts (intertemporal) investment decision
Government consumption wedge
Efficiency wedge
Consumption
A
B
Nonmarket
activity
Labor wedge
Consumption
A
B
Nonmarket
activity
Capital wedge
Future
Consumption
A
B
Current
Consumption
Government consumption wedge
• Unproductive government spending
• Resource constraint
Yt =Ct + It + Gt + Xt - Mt
Results
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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
Investment and government wedges
cannot account for downturn and recovery
Convergence or Regional Boom?
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Barry (2002)
Rapid growth in 1990s was a regional
boom
Region  very open labour markets
If good shock hits region  boom
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Ireland’s case: FDI
Bad shocks can lead to a reversal!