National Competitiveness Council Twists the Evidence to Suit a Political Argument

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Take a very quick look at the green line on the chart below.  Very quick – the green line represents Irish labour costs.

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On a quick look, it appears that Irish labour costs started growing in 2010; and that by last year labour costs growth in the EU and Ireland converged.   Now take a closer look.  In reality, Irish labour costs actually fell in 2010.  In fact, the gap between the EU and Ireland are widening.  The chart was ‘structured’ to not only elide over these inconvenient facts but to actually give the opposite impression.  Welcome to the world of massaging stats to fit a political purpose.

For make no mistake – the National Competitiveness Council’s Costs of Doing Business in Ireland completely fails to present the reality of wages, labour costs and taxation in the Irish economy.  Instead, they construct ‘evidence and arguments that neatly into line with the Government’s desire to depress wages and cut taxes.  Funny that.

Are wages a danger to ‘competitiveness’?    First, let’s remind ourselves of the current situation, something the National Competitiveness Council (NCC) fails to do (again, funny that).  Using the last year for available date we find, using the mean average:

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Whether using the labour cost survey (which surveys firms) or the macro-economic data contained in the national accounts (where you divide employee compensation by hours worked) the results are pretty much the same.  We are well below averages – in particular, when compared to EU-15 countries not in bail-out (excluding really low-waged Greece and Portugal) or other small open economies.

So we start out pretty low.

Now let’s revisit the NCC’s chart above showing growth in labour costs in the market economy) and compare it with the actual trend since 2008.

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Compare this to the top chart.  This is a better representation – and it shows that growth in Irish labour costs is substantially below that of the Eurozone average.  Since 2008 Irish labour costs have grown by 1.5 percent.  In the EU-28 and Eurozone area, growth has been 10.9 and 11.2 percent respectively.  Yet the NCC makes the audacious claim

‘ . . . now is not the time for unions to make wage demands’

That’s an audacious political claim, unsubstantiated by the evidence.

Let’s turn to an alleged indicator of competitiveness – unit labour costs.  They are the only labour market element of the EU’s Macroeconomic Imbalances Procedure.  Dr. Rory O’Farrell has shown why this is an inadequate measure of competitiveness and you can read the discussion here.  I share this scepticism.  For instance, we don’t have a unit profit costs (though there is a provocative discussion of this here).  Competitiveness goes far beyond such simple measures.  But let’s play in the NCC sandbox.

The nominal unit labour cost index measures the growth of the ratio of compensation per employee to real GDP (excluding inflation) per person employed.   What does it show?  Here is the EU Commission’s estimate for 2015.

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The EU Commission expresses unit labour costs in 2005 terms.  It shows that by 2015, growth is minimal in Ireland.  The growth rate in the EU 28 and the Euro area 17 are substantially higher.

The NCC doesn’t show this basic ‘competitiveness’ indicator – even though it is only one that counts that in the EU’s macro-economic scoreboard.  They, instead, use the real unit labour cost – which is essentially the share of wages in the economy.  This, too, is fraught with problems but it shows that the wage share in the Irish economy this measure has changed much since 2005.  Nor has it changed much in the EU 28 and Euro area.  It tells us little about wages – but a long-term analysis shows that throughout the EU, the wage share has fallen as profits have risen.

The NCC also raises red flags over taxation.  This would take another blog to go through this analysis; suffice it to say, they once again they elide over uncomfortable facts.  Taxation on Irish labour is low, low, low

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We can go around the houses debating the impact on this wage level or that, the distribution of taxation between the employee and employer; fine, let’s have that debate.    Let’s discuss the trade-off between a higher social wage (employers’ PRSI) and the benefits that employees would receive via free health services, pay-related social insurance pensions, and pay-related unemployment benefit.  Such measures which would have a beneficial impact on business, too, through higher demand arising from the fact that workers don’t have to purchase public services and income supports from an expensive private market (this will surely feature in the debate over the Government’s privatised health insurance plans).

These are all important debates. But let’s start with the reality that we have the lowest levels of taxation on labour in the EU, bar Bulgaria and Malta.

In conclusion, here is where we are at:

  • Ireland is a low-waged economy –relative to our peer group in the EU (EU-15 or what can be called advanced EU economies).
  • We are falling further behind those averages as wage growth has been almost non-existent over the last five years compared to an average EU growth rate of 10 percent.
  • Growth in unit labour costs, similarly, is almost nil – compared to substantial increases in the EU.
  • And we have ultra-low levels of taxation on labour.

If the NCC doesn’t want to acknowledge these demonstrable and verifiable facts, then the debate will be all the poorer. And they will be unable to make an independent contribution to the debate – one that people have confidence in.

NOTE:  for an evidence-based analysis of wages and labour costs, see Unite’s ‘Ireland Needs a Wage Increase.’

 

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