Was Ireland's Celtic Tiger Period Profit-led or Wage-led?

Abstract

This paper examines the macroeconomic performance of the Irish economy in the years leading up to the Celtic Tiger period and afterward, from 1980 to 2011. The goal of the paper is to determine how a severe recession in the 1980s could be followed so quickly by the unprecedented boom years of the Celtic Tiger, and followed again by the marked economic downturn since 2007. I build a Keynesian model of growth that integrates effective demand and productivity regimes to allow for the possibility that a redistribution of income can either spur or retard growth, depending on whether the regime is wage-led or profit-led. Using data for the Irish economy I test this model for wage-led or profit-led growth, finding plausible evidence that the Celtic Tiger years were, in fact, profit led.

Acknowledgment

I thank two anonymous referees for helpful comments that greatly improved the paper.

Notes

¹Bhaduri (2008, p. 148) puts the distinction between wage-led and profit-led growth nicely: ‘In a closed economy, any redistribution of income between profits and wages affects aggregate demand through two different channels. If the propensity to consume out of wage income is higher than that out of profit income, redistributing income against the wage earners would depress total consumption expenditure, but at the same time it might stimulate investment expenditure through higher profit share to counteract the depressing effect of lower consumption on aggregate demand. Depending on which of these two effects dominates quantitatively, two alternative possibilities emerge for demand-led expansion. The case dominated by greater consumption expenditure due to higher real wages and lower profit share is called wage-led, whereas the case dominated by greater investment expenditure due to higher profit share and lower real wages is termed as profit-led.’

²Verdoorn's Law posits that economic growth is accompanied by rising labour productivity owing to economies of scale (Taylor, 2004, Chapter 2).

³Several studies have estimated γ at around 0.23−0.27 for the Irish economy (see Bergin et al., 2003).

⁴As Blecker notes, when the variables are expressed as growth rates, the exponents of equation (10) can be interpreted as elasticities.