Measuring Ireland’s Price and Labour Cost Competitiveness

This article describes recent trends in the price and labour cost aspects of Ireland’s competitiveness. The competitiveness of the Irish economy is especially important given the economy’s dependence on international trade and foreign direct investment. The Central Bank’s competitiveness indicators, including new indicators on labour cost competitiveness, are explained and their respective merits are discussed. According to a range of the Bank’s economywide competitiveness indicators, the Irish economy has experienced substantial losses in price and labour cost competitiveness during the past decade. In the early part of this decade, the appreciation in the real exchange rate could be explained by the unsustainability of a ‘super-competitive’ starting point. Further into the decade, the strong personal consumption growth and the housing construction boom may have temporarily counter-balanced the consequences of the significant deterioration in competitiveness on the economy’s growth rate. Recent prices and labour costs in levels are also described relative to those of important trading partners. The downwards adjustment of prices and labour costs last year should provide a timely boost for export competitiveness, made all the more necessary by the sharp depreciation of sterling against the euro during the past two years. The competitiveness gap looks set to close further during this year, although much will depend on the projected rebound in productivity growth and labour market developments.