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THE ECONOMIC AND SOCIAL REVIEW
elements of the economic geography perspective proposed by Krugman (1997),
who notes that the declining importance of conventional transport costs in
international trade has made Ireland less ‘peripheral’ and therefore more
attractive as an export platform for FDI.
Our second shock represents a decline in labour-market distortions, which
Honohan and Walsh also emphasise. They note that “... wage restraint has
been a hallmark of the recovery. This is partly attributable to the high levels
of unemployment that had been reached in Ireland and the United Kingdom,
partly to union restraint exercised in the process of centralised pay
agreements (associated with tax reductions) and partly, perhaps, to reduced
union power in much of the economy”.
Proponents of the importance of social partnership point to the Calmfors
and Driffill (1989) proposition that labour-market outcomes associated with
either a “corporatist” well-organised central bargaining system or a US-type
system in which labour unions have very little power are better than those
generated by decentralised collective bargaining systems such as had
previously prevailed in Ireland .8 There is broad agreement at least that social
partnership facilitated wage moderation by offering a forum in which it could
be traded for the promise of future income-tax reductions. We model these
processes as a shock that shifts the economy from an initial low-employment
monopoly-union equilibrium; Oswald (1985).
Our third shock represents an increase in TFP. Crafts (2005) shows that
annual TFP growth in Ireland, calculated on a GNP basis, jumped from 1.68
per cent between 1979-89 to 2.51 per cent from 1989-99. He attributes much
of this to ICT production, based on inward FDI from the US.9 This shock,
therefore, we can think of as going hand-in-hand with the capital-market
shock discussed above.
II COMPARATIVE STATICS OF THE MODEL
The structure of the model, which is presented formally in the next
section, is very simple, since we focus on the production side and ignore
consumption decisions and the time path of consumption and saving. We have
a model of imperfect labour mobility where the decision whether to work at
8The essential idea is that at both extremes labour-market outsiders have a greater voice in the
determination of labour-market outcomes.
9In 2000, computer equipment employment in Ireland was ten times greater than that in the
EU15 (as a proportion of manufacturing employment); electronic components was four times
greater, and software about one and a half times (as a share of manufacturing and market
services); Barry and Curran (2004).