What’s Behind the Central Bank’s Destructive Agenda to Drive Down Wages?

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Jimmy Kelly of Unite has an article up on the Journal.ie at the moment that is worth paying attention to. He asks why the Central Bank of Ireland recently claimed that Irish labour costs are too high and that wage cuts of up to 10 per cent are needed to ‘restore competitiveness’.

The CBoI statement, however, provided absolutely no evidence as a basis for making the suggestion.  On the contrary, as Jimmy thoroughly explains, there is plenty of evidence that Irish wages when compared to EU countries are well below average and with Greece is the only EU country where wages are falling.

UNITE has put together the true picture of Irish labour costs by using data from the EU Commission’s data agency, Eurostat. We examined the private sector (or what’s called the ‘Business Economy’). What does this picture look like?

Ireland ranks 10th out of the EU-15 countries, right at the average. Nine other countries have higher labour costs. However, this graph doesn’t tell the full story.

  • When Irish labour costs are compared to those of EU-Core countries (excluding the poorer peripheral countries), Ireland falls 11 percent below average, ranking second to last.
  • And when compared to economies with a similar structure as our own (small and open, heavily reliant on exports), Irish Ireland falls 18 percent below average, ranking last.

The below average wage costs are particularly marked in low-wage sectors.

 “In the hospitality (hotels and restaurants) and wholesale & retail sector, Irish labour costs are seven to eight percent below the average of other EU-15 countries. When compared with EU-core countries this falls 16 to 18 percent below average. And when compared to similar small, open economies this falls a staggering 26 to 27 percent below average. That puts the propaganda in context.”

But there is another aspect that might surprise people who are forced to listen to this propaganda day in day out. So called competitiveness is not derived from labour costs, as many large wage economies are the most competitive, as the CBoI knows. In any case, the Irish economy has always been highly productive.

“Forfas looked into this issue recently and found that, even when adjusting for the accounting practices of multinational companies, Irish productivity was high by EU-15 standards.

In pre-recession 2007, Irish workers were still producing more per hour than their counterparts in the EU-15 – and that’s with a sizeable proportion of the economy involved in construction, a relatively low productivity sector. It is certainly true that Government policies deformed the economy through pump-priming the property boom – but Irish workers still went on working and producing at very high levels.”

This agenda to drive down wages does have an impact. By cutting wages in the economy the result is reduction in domestic demand which undermines the sectors that provide the largest employment.

“In short, the Central Bank’s proposal would drive down people’s living standards, increase the deficit and collapse domestic demand with all the impact that would have on unemployment and business closures. The Central Bank’s proposals would make a wasteland of the Irish economy.”

So why are the Central Bank of Ireland making this call and undermining the ability of the Irish economy to recover?

 

4 Responses

  1. Richard

    October 18, 2012 1:15 pm

    Hmm, let’s see. The ECB has previous in calling upon national governments (namely Spain and Italy) to introduce ‘labour market reforms’, via secret letters to prime ministers. Had such a letter been sent to Enda Kenny, we can be pretty sure that both he and the Central Bank, the latter ‘responsible for maintaining price stability in Ireland through the implementation of ECB decisions on monetary policy’ would have fought tooth and nail to prevent wages from given down, right?

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  2. Donagh Brennan

    October 18, 2012 2:25 pm

    Well given that Kenny’s priorities and those of the ECB, and those other elected representative of the European corporate/financial sector are exactly the same, I could say that there is no need to send such a letter. In fact, while Triche may have found it necessary to write to Lenihan clarifying the point that Ireland has to accept the bailout given that Ireland put itself on the hook for the full repayment of subordinated debt originating in the shadow banking system, I would say, like one of those irritating couples that finish each others sentences, that Kenny would pride himself on making the suggestion in a Euro summit any time the word “competitiveness” gets mentioned.

    However this move is all of a piece with the program of austerity, which of course started earlier in Ireland than any other EU country. In a shrinking economy and with no sign of investment the only way to ensure profits can rise is to force wages to fall faster than earnings. In the absence of state-led investment and cut backs in services during a recession there is both a fall in wages and an increase in opportunity to avail from services that the government is no longer willing to fund. Demand for these services during a recession not only remains the same, it increases. It’s a rock solid growth area for the private sector where demand is guaranteed and the investment required is minimal as all that is needed is just the changing of some letter headings and a snazzy advertising campaign.

    As Michael Burke put it recently:

    Even though GDP has been contracting throughout the period, profits have risen in the last two years. At the same time employees’ remuneration has fallen sharply. In a recession the natural tendency is for profits to fall. This is because profits are the surplus after fixed costs and costs of labour and other input costs are deducted. Since fixed costs for firms are often unchanged, the fact the wages do not fall faster than sales means profits decline. This is what happened to profits in both 2008 and 2009. However, after ‘austerity’ measures were introduced in 2008, wages fell in 2009 and have continued to fall since. This has allowed the natural fall in profits to be reversed, at the expense of wages.

    This is what is behind the Central Bank of Ireland’s agenda.

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  3. Laura Farrell

    October 18, 2012 9:03 pm

    What neither the Central Bank nor this article accounts for is the inequality in Irish wages. One of the reasons that our “average” looks so high is because of the distortion caused by a small number of very high earners, particularly in public sector funded roles. Lower end roles, even in skilled industries, have been falling lower for years while wages at the upper end take off.

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