Looking under the carpet: A granular approach to the unusual productivity growth in Ireland

Abstract

This paper is aimed to empirically test for an open and small economy like Ireland the “granular hypothesis” (Gabaix, 2011), originally proved for the US, which posits that firm-level productivity shocks can explain a sizable portion of aggregate productivity fluctuations. Additionally, the author tries and tests a second hypotheses suggesting the, given the small size, less diversification of the Irish economy, compared to that of the US, the granular effect is likely to be stronger and more important. The Irish case is particularly relevant as Ireland has been experiencing increasing economic concentration in recent years, to the point that micro shocks to a few selected firms in 2015 led to significant level shifts in aggregate variables like GDP (+34 per cent) and, particularly, labour productivity (+23 per cent) and total factor productivity (−12 per cent). Making use of an original combination of macro data from the Ireland's Central Statistics Office (CSO) and the OECD with micro data from the Annual Business Survey of Economic Impact (ABSEI), both granular hypotheses are tested in Ireland for the period 2000–2016.

Research findings confirm that productivity shocks to the 5 largest firms (in terms of value added) in Ireland account for a large fraction (about one third) of aggregate productivity growth, which is much larger than that found of the US economy. These empirical results shed light on the origins of Irish productivity fluctuations, the consequences of economic concentration on resilience and the importance of diversification policies aimed at broadening Ireland's enterprise base of productive firms.