January 13th Evening: The Recession Diaries
Ever get that sinking feeling - like your tied down to the railway tracks and the train is coming around the bend? And your rescuers - they’re actually waving the train on. Yes, in times like these it takes a brave soul who can kick back and party.
In recent days we have been subjected to an onslaught of economic prescriptions - medicine that can only make us sicker. IBEC calls for 70,000 people to be fired - or the cash equivalent. How putting thousands on the dole is going to improve things simply mystifies me. At the more lunatic fringe we are treated to suggestions that over 150,000 public sector workers could be fired and that the public sector bill should be cut by over 70%. Colm McCarthy- the Grand Wizard of Snip - is suggesting we sell off public enterprises (I guess he’s impressed by the results of our telecom privatisation) and reintroduce domestic rates. And the head of the PSEU raises the prospect of an IMF intervention whereby thousands will be thrown out of work in a deflationary obsession with budget deficits. Cut wages, cut spending, cut living standards - the trade union movement and the wider Left are not even in the debate.
Is there a way to battle back? Yes, but it will require a forensic deconstruction of the arguments used by the ‘cuts brigade’ coupled with a recovery programme that relies on the only engine capable of growing the economy (or, in the short-term, at least to minimise the contraction): the public sector. Let’s start with the call for cutting wages - in both the public and private sector.
The ESRI’s John Fitzgerald suggests, at a minimum, that public sector wages be cut by 5 percent, as a step towards restoring our competitiveness. Of course, cutting public sector wages has little to do with ‘competitiveness’; its greater impact would be on the nation’s finances. But what would the effect be?
Cutting public sector wages by 5 percent would gross the Exchequer approximately €900 million. However, this is the top line. Take out lost tax revenue and PRSI the net saving would probably be of the order of €500 and €550 million. And this does not take into account the loss of spending taxes and the multiplier effect (the effects of reduced consumption on economic activity).
So, €500 million. It’s a big enough sum but given our dire budget deficit it is a drop in the ocean. In the Government’s revised projections, the General Government Deficit is estimated to be over €17 billion. A 5 percent pay cut would amount to less than 3% of the deficit. Put another way, the general government deficit would fall at most from 9.5 percent to 9.3 percent of GDP. The economy is going to hell in a hand basket and we are presented with solutions that amount to fractions (at least Prof. Karl Whelan pointed out that civil service wage cuts would amount to a pittance).
Of course, a public sector pay cut would be used by private sector employers as an excuse to make similar wage cut demands. Unionised workplaces might just resist this but given that 75 percent of the private sector is not unionised, it is unlikely these places will have similar success. And with the recession, it won’t be easy to leave your job and pick up another. Most employees will be trapped.
Would a five percent wage cut in the private sector restore ‘competitiveness’? Hardly. Using the recently published CSO’s Annual Services Inquiry we can see that such a cut would reduce enterprise operating costs throughout the entire non-financial services sector by 0.7 percent. In the manufacturing sector, the savings would be even less given that this sector is less labour-intensive.
There is a good reason why cutting wages will have little impact - Ireland is already a low-waged economy. This has been canvassed so many times the facts don’t need to be repeated. But, hey, let’s repeat one stat. Inthe EU-15, wages made up nearly 49 percent of the total wealth produced (GDP) while in Ireland wages made up 41 percent. Only Greece is lower than us in the wage table. Irish wages would have to increase by nearly 20 percent to reach the EU average. And this doesn’t tell the full story as in 2007 Ireland had a relatively low level of unemployment. So total wages were higher in the EU-15 even through there were fewer people at work than in Ireland.
Let’s just briefly look at one more report - Forfas’s The Cost of Running Retail Operations in Ireland. Let’s look at one straight-forward comparison within the Eurozone (I’ll deal with UK comparisons in a later post - they are complicated by exchange rate movements). The cost of running a retail operation in Dublin was compared with that in Maastricht which was considerably less expensive. Let’s survey some of the reasons why Dublin is more expensive:
Wages: In Maastricht, wages are higher for four grades of employees - Sales Assistant (12.7 percent), Customer Sales Rep (26.6), Retail Buyer (19.7) and (9.0). So, we can discount wages as the reason for high operating costs here. And we can also discount employers PRSI contributions: here they are 10.75 percent, in the Netherlands it is 17.28 percent - 61 percent higher. Add all that together and labour costs are substantially less than here.
High Street Rental Costs: Ah, now here’s a cost factor. In Grafton Street rents are €9,500 per square metre; in Maastricht’s Grote Straat, rents are only €1,500 - six times less.
Utilities: Electricity prices in Dublin are only marginally higher than in Maastricht (if the Energy Regulator allowed the ESB to compete in the marketplace they would be lower) but gas prices are cheaper in Dublin.
Fixed Telephone Costs: considerably cheaper in Maastricht - maybe their main telecom company isn’t owned by an Australian private equity company. Costs are between 20 percent and 50 percent cheaper with local mobile calls coming in at 15 cents a minute, compared to Dublin’s 45 cents per minute.
Water and Refuse Charges: Refuse charges are 42 percent higher in Dublin but water charges are 22 percent cheaper.
Transport and Fuel: Inbound freight costs are more than 50% cheaper for Dublin, while both petrol and diesel are cheaper here. Indeed, labour-related transport costs are nearly 20% cheaper here.
IT Service costs: another huge gap opens up. In Dublin it costs €166 per hour for IT service; in Maastricht it costs less than €32 per hour.
Courier Costs: in Dublin it costs less than €9 to deliver a package, in Maastricht it costs over €48. May I offer a reason - given that courier deliveries are labour-intensive we have one more example of cheaper labour costs here.
What can we make of all this? One thing is certain - it is not wages that are driving up Dublin costs compared to Maastricht. If anything, our low wage structure is keeping costs down. Given other high costs - rents, telephone, IT service costs - we could say that it’s capitalists cannibalising capitalists. That might be funny except that already low-wage workers are being asked to pay the price.
But one other important thing we can make of it - that the call for wage reductions as a way back to competitiveness is just another quick-fix solution - of the type that Homer Simpson excels in; y’know, taking an axe or hammer to anything he can’t figure out how to work. What’s more, such policies will reduce business activity even further, resulting in more unemployment, less tax revenue (resulting in a worsening of the budget deficit) and, of course, even more demands for wage cuts.
This is the viscous cycle downwards we have to challenge. And a good place to start is by citing the facts.
And by coming up with something different - really, really different.
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