employment will only occur in the high-tech industries where the technology involves skilled workers in the production process.
Commensurate with the changing role of manufacturing, the analysis in Chapter 2 shows that the business and financial services sector is in the process of becoming significantly more important as a channel through which world economic activity is transmitted to the Irish economy. It would appear that Ireland’s comparative advantage on world markets is shifting towards the production and export of business and financial services. This sector is among the most human-capital intensive in the economy. Many of the services produced by this sector also benefit from the fact that English is the language of the sector internationally.
The move from manufacturing to business and financial services could be expected to have some negative effect on measured productivity, because statistical methodologies are not yet sufficiently developed to capture productivity changes in these services. However, even if there were to be a negative productivity effect, it is likely that it would be significantly offset by a terms of trade gain. The business and financial services sector seems to be able to increase exports and its market share in world trade without any negative impact on prices. This probably reflects a relative undersupply of skilled labour worldwide causing output prices of services with a high skill content to rise. As a result, Gross National Disposable Income (GNDI), a more appropriate measure of living standards than GDP or GNP, may rise more rapidly than GNP over the coming decade due to a reversal of the past trend loss in the terms of trade.
The second major area where changes in behaviour are under way is the labour market. Whereas in the past there was a large potential supply of mobile Irish labour that moved backwards and forwards from the UK, the rest of the EU or even the US, the bulk of the mobile workers in Ireland today are foreigners. The variables that drive decisions on migration by foreigners are different from those that mattered to Irish migrants. For example, for Polish immigrants a key factor influencing their decision to come to Ireland is their potential earnings in Ireland relative to Poland whereas for previous generations of returning Irish emigrants it was their potential earnings in Ireland relative to the UK. The rapid growth of the economy in recent years also means that public and private infrastructure (housing in particular) is in short supply, raising the cost of living in Ireland for returning emigrants and new immigrants alike. This means that the more emigrants that come to Ireland in a particular year the higher will be the cost of housing which will, in turn, affect the numbers coming. This means that the bigger the increase in employment in a year, requiring more immigrants, the bigger will be the rise in wage rates. In effect, the supply curve of labour is now much less elastic than in the past, which affects the labour market in two important ways:
First, any domestic stimulus to the economy, e.g. from fiscal policy, will tend to raise domestic wages and prices, crowding out the domestic tradable sector. This has been the experience of the economy in recent years, in contrast with earlier years, when there was an ample supply of mobile Irish labour and fewer infrastructure constraints.
Second, it also shifts the incidence of labour taxation. In the past, most of the incidence was on employers. To the extent that they could not bear
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the cost of increased labour taxes, they reduced output and employment. By contrast, today a significant part of any increase in labour taxation will fall on employees, having a more limited impact on competitiveness and employment than in the past. Obviously, the converse holds for cuts in taxation.
A further effect of the change in labour supply behaviour is that the labour market seems to adjust to changes in demand for labour more rapidly than in the past. While in the 1970s and 1980s people were slow to move abroad (or move back), today they seem to relocate more readily when faced with strong incentives – e.g. unemployment. This helps explain why the current rise in unemployment, though significant, has not been as severe as anticipated in the last Review.
The move from net emigration of Irish citizens to net immigration of foreigners not only changes the supply curve of labour; it also has wider implications for how the economy adjusts to shocks. Because many of the immigrants into Ireland are very well educated, immigration tended to narrow wage dispersion between 1997 and 2003 (Barrett, Fitz Gerald and Nolan, 2002). However, since then, while immigrants have still tended to be well educated, those from non-English speaking countries have been less successful in obtaining skilled jobs. This has probably contributed to some limited widening of wage dispersion since 2003 (Barrett and McCarthy, 2007).
The potential effects of migration on productivity were discussed in Chapter 2. However, there is limited evidence to date on this issue. What evidence there is suggests that having a mobile and flexible labour force does enhance productivity (e.g. Barrett and O’Connell, 2001). Also, access to a work force with varied experience and backgrounds seems to be important for the business and financial sector.