Simulation Model of the Irish Local Economy: Short and Medium Term Projections of Household Income Cathal O Donoghue, John Lennon, Jason Loughrey and David Meredith Teagasc Rural Economy and Development Programme 1
Rapid Growth to 2007 Big Fall post 2007 Macro-economic Indicators GNP pc fell to 2000 levels in 2011 Expenditure Increase 2007-2009 up 15% Fall in Tax Revenues 2007-2010 down 33% GDP pc & GNP pc Both in Constant Prices ( per capita) 45000 40000 35000 30000 25000 20000 15000 1996 2006 % GNP 45 40 35 30 25 20 15 10 5 0 Public Finance 2000 2005 2010 GDP pc GNP pc Tax Revenue Current Expenditure Source: CSO National Accounts
A decline of approximately 13% from the Employment Rate and Real Wage peak. The spatial change? Lost most of the employment gain of Celtic Tiger Disproportionately Young or Male Employment rate of women under 35 higher than men in 2011 Big falls in share of construction (50% fall in share amongst males) 0.64 0.62 0.6 0.58 0.56 0.54 0.52 0.5 2000 2002 2004 2006 2008 2010 2012 750 130,000 740 120,000 110,000 730 100,000 720 90,000 710 80,000 700 690 680 670 70,000 60,000 50,000 40,000 2002 2003 2004 2005 2006 2007 2008 Household Disposable Income Trend in Disposable Income 2009 2010
Budget Constraint for a married couple with children 2003-2007 (Adjusted for CPI) Disposable Income per Year 50000 45000 40000 35000 30000 25000 20000 15000 0 20 40 60 80 Hours per Week 2003 2004 2005 2006 2007
Budget Constraint for a married couple with children 2007-2013 (Adjusted for CPI) Disposable Income per Year 50000 45000 40000 35000 30000 25000 20000 0 20 40 60 80 Hours per Week 2007 2008 2009 2010 2011 2012 2013
Price and Wage Inflation and Policy Updating (2007-2013) Significant earnings growth heterogeneity 160 150 140 130 120 110 100 90 80 2002 2004 2006 2008 2010 2012 2014 UA Single Old Age Single CPI Tax Credit Industry Hotel & food Financial Public admin Health
Price and Wage Inflation (2007-2013) Significant earnings growth heterogeneity 130 120 110 100 90 80 2002 2004 2006 2008 2010 2012 2014 CPI Industry Wholesale & retail Transportation Hotel Information and communication Financial Real estate
Change in Gini Coefficient Gini rose to peak in 2005, falling over 3 points between 2005 and 2008 with onset of crisis 0.34 0.33 0.32 0.31 0.3 0.29 0.28 2003 2004 2005 2006 2007 2008 2009 2010 2011 Eq Disposable Income (SILC) Equivalised Disposable Income (parametric equivalence scale, 0.5)
Test Microsimulation Ireland Benefit Take-Up
Nowcasting using Dynamic Ageing
Challenges Fast moving economic situation Significant policy changes need quick analysis However data often produced at a lag of two years However other data sources (LFS, Admin Data) more quickly available Reweighting tools in this fast moving environment may not give us enough control to adapt to the component changes Solution apply a dynamic microsimulation model
Methodology Options Static Ageing (Reweighting) Dynamic Ageing Such large multi-dimension changes Over-reliance on small numbers Static Ageing Difficult Therefore develop system of equations Bourguignon, Fournier, Gurgand (2001) Bourguignon, Ferreira, and Leite (2002) O Donoghue (2002)
Methodology Historical Simulation micro data contains changes in all components simultaneously Estimate a system of equations representing labour market states and income sources Use Micro-simulation model to simulate each stage in turn on each micro population for historical years See Bourguignon, F., Fournier, M, Gurgand, M. (2001) Forward Simulation Simulate income distribution from last data year using system of equations (dynamic microsimulation model) using official statistics based calibration totals See O Donoghue and Li (2012) Simulate Disposable Income using Tax-Benefit Model In-work Capital Income Employee Self-Employed Retired Unemployed Inactive Public Farmer Non-Farmer SE Contract Farm Y Part-time Student Occupation Industry Part-time SE Earnings Earnings
Calibration-Alignment We calibrate all the labour market variables to the Irish LFS (QHNS) Process Use a system of equations With Calibration P(I) = f(xb + e) e such that I* = 1 if I = 1 in data and v.v. Select on rank of XB + e Similar for Multinomial Logit Calibrated to external control total In the case of calibration rates equal to the raw data, the model will simulate the same values as the r Advantages Allows for non-random relationship Can incorporate a more diverse system, factoring sector specific impacts
Alignment to LFS In order to project we use alignment or calibration Firstly comparing history with alignment similar trend by higher inequality due to different employment rates between micro data and external data Project using the same calibration totals
Dynamic Ageing Now Casting
Spatial Impact
Spatial Analysis Challenges No spatial income data New Book Plug! Census has no incomes Income Data has no spatial component Solution Develop a Spatial Microsimulation Model of the Irish Local Economy Baseline Population Utilise Quota Sampling [Farrell et al., 2012] Sampling Households from EU-SILC Calibrated to 3400 districts from 2006 Small Area Census Improve spatial heterogeneity via Aligned Simulation [Morrissey et al., 2012]
External Validation initial quota sample Match variables Excellent Match Compare SMILE Household Poverty Rate by County ESRI Survey on Household Quality Correlation 0.79 However there is much greater spread in the NSHQ than in the SMILE output. NSHQ 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 SMILE
Validation Average Disposable Incomes post calibration
Spatial Map of Disposable Income
Validation Poverty (post Calibration) 85% Correlation
Between and Within District Variability District Market Income I2 0.46 Between % 5.3 Within % 94.7 Gross Income I2 0.31 Between % 5.3 Within % 94.8 Disposable Income I2 0.21 Between % 5.6 Within % 94.5
Spatial Projection Challenges Highest growth rate of unemployment (red) highest in commuting zones around cities No 2011 Census until last month Require timely spatial information Solution project spatial labour market Here treat demographic change as exogenous see Lennon et al (forthcoming) However Regional (8) trends in Employment and Unemployment QHNS lag two quarters Unemployment claimant data at Social Welfare Office Level () National Accounts Estimates of Household Primary and Disposable Income at the County Level Earnings, Hours and Employment Costs Survey Update Earnings from 2005 to 2011 based on Index numbers for Earnings by Occupation and Industry
Change in Male Live Register relative to National Average
Spatial Projection Challenges Employment E 2006 = f(b 2006 X 2006 +s 2006 ) Where X 2006 - Demographic Distribution at District level Spatial fixed effect s 2006 Challenge Combine to generate spatial change in Employment, [Also Occupation, Industry, Unemployment] ` E 2011 = f(b 2011 X 2006 +s 2011 )
Methodology Produce spatial fixed effect s 2006 Apply national Age-Sex Employment Rates to District in 2006 Compare Difference with 2006 District Census to identify spatial fixed effect Model changes due to Age-Sex Employment Differentials from QHNS B 2006 X 2006 B 2011 X 2006 However likely changes in spatial fixed effect over and above national age-sex changes due to spatial heterogeneity in labour market structure s 2006 s 2011 Utilise Regional QHNS to produce differential employment data at NUTS3 region Social Welfare Office Data to spatially differentiate change within region adjusted for age-sex differential Assume remaining intra Social Welfare Office Differential changes are due only to age-sex differential
Change in Equivalised Disposable Income Model resulting impacts in terms of market income and disposable income using a microsimulation model We see a general reduction in living standards (red), but differential effects 28
Higher poverty in Deep Rural areas relative to Commuting Zones The pattern of higher poverty spread to wider areas, reflecting the changed employment and income changes 29
Thank You 30