15/4/2013: Irish Labour Costs: IDA spin and reality

IDA presentation claims loudly & boldly that Ireland is one of 3 countries where nominal wages have dropped (slide 5).

This raises two questions.

1. An existential one: are dropping nominal wages a good thing? Well, not really. For a number of reasons. Firstly, declining wages = declining domestic demand and investment. Now, IDA - focused on MNCs and FDI - might not give a damn about these two aspects of the economy, but sadly they are more important to Ireland than IDA-sponsored multinationals, as the last 6 years of the Great Recession clearly show. Secondly, declining nominal wages = lower incentives to locate talent into Ireland and develop human capital here. Now, that is something IDA should care about, since this cuts the ability of its MNCs to continue creating the illusion of productivity here. Thirdly, declining nominal wages may mask loss of efficiency and productivity in some sectors and superficial gains in efficiency in other sectors. How so? Ok, suppose wages in a less productive sector, like construction or retail fall, while wages in more productive sector, like ICT rise. Average or median wages across economy might fall, but competitiveness might also decline where it matters - in higher growth sectors. Sadly, IDA seem to have no clue that this is what appears to have been happening in the economy, presumably because it would put a bit of a brake on the IDA spin. But see table below to verify that the above factor 3 does indeed apply to Irish data.
2. A factual one: is this claim true. Now, here's Paul Krugman's article saying it is not true: http://krugman.blogs.nytimes.com/2013/04/13/dnwr-in-the-ea/ . But what about raw, direct data from Ireland? CSO provides: http://cso.ie/en/media/csoie/releasespublications/documents/earnings/2012/earnlabcosts_q42012.pdf and the end game is: average hourly earnings in Ireland in Q4 2012 were +0.6% y/y and +0.7% q/q in the private sector, and down -0.4% y/y and +0.6% q/q in public sector. So unless IDA cares about labour costs in the public sector (presumably because IDA have discovered a treasure cave full of MNCs in Irish public sector), Irish nominal earnings are up, not down.

There are other problems with claims IDA makes. Wages might fall, but cost of labour might still go up due to increased cost of Government related to payroll and income taxes. Conveniently, CSO provides raw data on this too. Total labour costs in Ireland as of Q4 2012:

• Increased in the private sector +2.6% q/q and +1.3% y/y
• Compared to 2008, these were down from EUR23.51/hour to EUR23.31/hour - a massive decline of 0.86% in 4 years, cumulative.

Judge for yourselves as to what the dynamics in Irish wages (earnings and total labour costs, to be more precise) are (for all sectors reported by CSO):

No comment needed.