Labour Market Rents and Irish Industrial Policy

This paper examines the issue of whether harmonising taxes across the traded and non-traded sectors is desirable. Preferential treatment for the traded sector might be justified if either the output response of subsidies is higher in the traded sector, or if the jobs generated in the traded sector are associated with higher productivity than those in the non-traded sector. The concept of industrial development agencies acting as discriminating monopolists in setting the grant level in different projects underlies this view of the role for industrial policy. This paper uses a simple two sector small open economy model to analyse the first theoretical justification for industrial policy, and input-output analysis to evaluate the second. Analysis shows that neither argument for industrial policy holds when applied to Irish manufacturing and traded services. The paper consequently concludes that there is no compelling argument for lower taxes on the traded sector.

  • Authors: Frank Walsh
  • Year: 1999
  • Organisation: University of Dublin
  • Publisher: University College Dublin
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