January 19th Morning: The Recession Diaries

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My oh my. My assertion that Ireland is a low-waged economy and that public sector wage cuts will have little impact has generated a lot of comments, some of them challenging my contention and the use of statistics. I had intended to do a piece today on Sean Fitzpatrick’s legacy to our economy but as readers have taken the time to post comments, I’d like to take the time to respond. First, let’s look at the evidence regarding Ireland’s low-wage status as Simon specifically asked for.

  • The OECD’s 2005 Wages and Benefits Database, measuring all private sector employment, shows that Ireland lies 11th in the EU-15 table, nearly 11 percent below the average wage. Comparing ourselves with the top ten economies in the EU – of which we are one – we find Irish private sector wages 25 percent below average (the OECD database has been updated to 2006 which I haven’t had the chance to examine – maybe someone can tell me if the situation has improved).
  • ICTU presents further OECD data to show that Irish annual labour costs are 26 percent below the EU-15 averge.  This data, however, is presented in dollars with equal purchasing powers.  When this is taken into account, Irish labour costs are, in nominal Euros, somewhere between eight and eleven percent below the EU-15 average.
  • In the US Bureau of Labor Statistics(2006) measurement of manufacturing wages, Ireland ranks 10th in the EU-15 table, only 2 percent below average. However, the average is skewered by the ultra low earnings in Portugal and Greece. When compared with the ten wealthiest countries, Ireland comes in dead last – 16 percent below average.
  • Eurostat’s latest European Business (data from 2004) shows that in the non-financial market sector, Ireland is below average (- 3 percent), ranking 10th in the EU-15 league tables. Again, however, we bring up the rear when compared with the ten wealthiest economies – 11 percent below the average.
  • SIPTU cites Eurostat’s 2007 hourly labour costs which show Ireland well below the EU-15 average – 11 percent below.
  • The Central Bank cites the same US stats above in the manufacturing sector but also cites the EU’s AMECO base which shows that Ireland’s labour cost per hour is slightly above the EU-15 average. Again, however, comparing ourselves to our peer group, we come in the lower half, 8 percent below average.

There are other surveys – the Deloitte Remuneration Survey (2006) showed Ireland ranking 14th out of 25 EU countries surveyed – with most of those behind us constituting the new member states. German labour costs came in at €50,417; Ireland lagged far behind at €36,852. In 2005, Mercer conducted a remuneration survey which showed Irish wages 10 percent behind the EU-15 average.

I readily admit that, instead of saying Ireland was a low-wage economy, I should have said ‘relatively low-waged economy’ – relative to the EU-15. Still, the argument that Irish wages are somehow out of kilter with advanced economies is unsustainable. In almost all surveys, they rank below average – sometimes well below.

None of this is an argument for ‘increasing wages’ or giving ourselves pay deals that, in particular sectors or enterprises, are unaffordable. The point being made is that cutting wages is not a solution to growth nor is it a solution to the deficit. The Forfas report showed that, despite Maastricht retailers paying higher wages than in Dublin, it still costs less to operate a retail enterprise there than here. Is someone trying to tell us something and are we listening?

Tomaltach makes two valid point: first, that I was being unfair to suggest that private sector employers would use a cut in public sector pay as an ‘excuse’ to cut pay. Yes, in many companies, pay freezes and even cuts are necessary to survival. Again, I should have stated that ‘some employers’ would use it as an excuse. But I would make a further point – that pay cuts can disguise serious managerial deficiencies, the type of which the FAS survey highlighted. Many employers and managers are loathe to admit their own inadequacies and would rather seek out easy targets – such as the payroll.

Secondly, Tomaltach rightly points out that I used the total deficit (current and capital) when calculating the benefit of a public sector pay cut. Instead, he says I should have used the current budget since that is where the deficit is wreaking havoc. I take that point but let’s not forget that the Maastricht guidelines do not distinguish between the two. Nor do Government Ministers when they use figures like €18 billion deficit. Nonetheless, these are the respective figures

  • A 5 percent cut in public sector pay will, at most, bring down the General Government Deficit from – 9.5 percent to – 9.3 percent.
  • That same cut will bring down the current budget deficit from – €11,300 to – €10,800, a reduction of 4 percent

A number of comments take me to task over using the ‘wages as a proportion of GDP’ figures and the fact that it was low. I certainly did not mean to suggest that this was a clincher argument regarding our relatively low-wage status. But regular readers of this blog will know that I have covered this topic before, in particular highlighting UNITE’s survey of comparative wages in ‘The Truth About Irish Wages’.

My use of this particular fact was to show, along with other arguments, that cutting wages will not necessarily restore ‘competitiveness’ for the simple reason that the wages component of our total output is already low. Now, if we are in a recession and wages are a low component, is the only argument that some resort to is to cut wages even further?  Without considering the effect this will have on confidence and demand?

I, of course, used GDP rather than GNP. GDP represents all the wealth our society produces. Therefore, to examine wages or investment or consumption or Government input, as a proportion of that total production is valid. Using GDP shows the proportion that wages take in creating total wealth; using GNP shows the proportion of what we have left behind after the multi-nationals do their thing. If wages are high, as a proportion of total wealth creation, thus squeezing out, say, investment, then we might be able to say that wages are a problem.

Let me wrap up this useful discussion: I hope I never hide behind ‘numbers’ (though I admit, Aaron, that I am a ‘leftie’). What gets me is that, in the larger debate, simplistic proposals are advanced not for economic reasons but for political (or ideological) ones. And sometimes they are just plain whacky. For instance, does IBEC really, really believe that cutting public sector numbers by 20 percent would actually assist recovery? Putting thousands on the dole queues, slashing demand, cutting necessary public services? Has the national debate so deteriorated that a serious organisation can make this argument and expect it to be taken seriously. ‘Numbers’ can hide but they can also illuminate, give us a wider perspective and challenge our pre-conceived notions.

Ultimately, we need to grow ourselves out of this mess. We cannot cut or tax our way out (though there is room to do plenty of these). What we need is enterprise – public and private; local, regional national and foreign; for profit and not-for-profit. All policies must serve that end.

In that vein, I’ll leave the last word to another reader, James, who posted the following comment:

‘Lenihan and Cowen continually tell us that the present borrowing levels are “unsustainable”. Quite right, except that nobody is asking them to sustain it. More to the point, an economy shrinking at 4% per annum is fairly unsustainable, and nothing that fails to address that will help the public finances.’

Yes, yes and yes.  And let’s keep the debate going!

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