This is my Sunday Times column from May 6, 2012 (last week), unedited version.
Latest research from ESRI shows that,
contrary to the prevalent opinion in the media and official circles labour
earnings in Ireland have been rising, not falling, during the early years of
the crisis. This trend, on the surface, appears to contradict claims of wages
moderation in the private sector, the very same claims that have been
repeatedly used to argue that structural reforms and changes in Ireland during
the crisis have seen a dramatic return of productivity growth.
The ESRI research, carried out by
Adele Bergin, Elish Kelly and Seamus McGuinness used data from the National Employment Surveys on the changes in earnings and labour
costs between 2006 and 2009. Per authors, “despite an unprecedented
fall in output and rise in unemployment, both average earnings and average
labour costs increased marginally over the period.”
Surprising for many outside
the economics profession, these findings actually confirm what we know from
Labour Economics 101.
Firstly, wages and earning are
sticky when it comes to downward adjustment. In other words, while wages inflation
can be rampant, wages deflation is a slow and economically painful process. This
is precisely why currency devaluations are always preferred to cost deflation
(or internal devaluations) as the means for correcting recessionary and
structural imbalances.
Secondly, wages deflation is even slower in the economies where
collective bargaining is stronger. Ireland is a strong candidate for this with
its Social Partnership and tenure-linked pay structures.
Thirdly, average earnings
movements reflect not only changes in wages, but also changes in the
composition of the national and sectoral employment. More specifically, as the
ESRI study concludes, the core drivers of rising earnings during 2006-2009
period were “increases in both the share of and returns to graduate employment
and a rising return to large firm employment”. Of course, both of these factors
are correlated with the destruction of lower-skilled and less
education-intensive construction and domestic services jobs.
Lastly, increases in part-time
employment also drove up average earnings. In fact, the latest figures from the
Eurostat show that a total of 7.4% of our currently employed workers are classified
as part-time employees willing to work longer hours, but unable to secure such
employment. This is the highest proportion in the entire EU27, and well above
the 3.9% reading for Greece.
Overall, ESRI researchers
concluded that “a good deal of the downward wage rigidity observed within Irish
private sector employment since the onset of the recession has largely been driven
by factors consistent with continued productivity growth.”
In my opinion, this is not a
foregone conclusion. Irish labor productivity may have risen during the period
of the crisis, but much of that increase is probably accounted for by the very
same four forces that drove increases in earnings. Higher proportion of jobs in
the economy within the MNCs-dominated exporting sectors, higher survival rate
for jobs requiring higher skills, and the nature of the early stages of public
sector employment cuts most likely simultaneously explain changes in both
earnings and productivity.
The latter aspect is worth
explaining. In the early part of the crisis, all public sector employment
reductions took place out of cuts to part-time and contract positions, thus
most heavily impacting lower earning younger workers. This would simultaneously
increase the proportion of higher paid public employees and the average
productivity in the sector. Post-2009, cost reductions have been running via
early retirement schemes, but these are not reflected in the 2009 data.
In other words, on the
surface, it might appear that Irish labour productivity has grown over time,
but in reality, it is the reduction in less productive workers’ employment that
has been driving these ‘improvements’. Incidentally, this story, not the ESRI
conclusion, is consistent with the situation where domestic economic activity
has contracted more than domestic employment.
In brief, our ‘productivity
gains’ outlined by the ESRI might be a Pyrrhic victory in the Irish economy’s
war for internal devaluation.
And the said victories
continued since 2009 – the period not covered in the ESRI study.
Since January 2010, earnings have
been falling in Ireland as jobs contraction became less pronounced and as public
sector entered the stage of early retirement exits. Irish average hourly labour
costs peaked at €28.0 per hour in 2009, 5.7% above the Eurozone average. In
2011, however, the average hourly labour cost in Ireland stood at €27.4 per
hour, 0.7% below Eurozone average. If in 2009 Ireland had the eighth highest
average hourly cost of labour in EU27, by 2011 we were 11th most
expensive labour market.
According to the Eurostat, across the
Irish economy, labour costs rose 7.7% in 2007-2009 period followed by a drop of
1.6% in 2010-2011. However, over the period of the entire crisis, the labour costs
are still up 5.2%. The only good news here is that our euro area competitors
have all posted higher labour costs inflation. The same pattern is repeated in
Industry, Services and across the Public Sectors. Only ICT and Financial
Services broke this pattern, driven by fixed wages in the state-owned domestic
banking, robust demand for IFSC and ICT specialists. In Professional,
Scientific and Technical Activities, earnings rose 6.3% between 2007 and 2011,
with wages moderation kicking in only from 2010 with a relatively strong decline
of 4.8%. Still, this is just half the rate claimed in the official promotional
brochures extolling the virtues of decreased labour costs in this area in
Ireland.
With relative stabilization of
unemployment and longer duration of joblessness, our average earnings are now
set to decline over time as younger educated workers come into the workforce to
replace retiring older workers. In the mean time, our productivity metrics will
continue to improve in specific MNCs-dominated exporting-heavy sub-sectors.
Competitiveness will improve, but not because real productivity will expand.
Instead, continued re-orientation of economy toward MNCs will drive headline
numbers as we become more and more a tax haven, rather than indigenous
entrepreneurship engine.
These accounting-styled gains in
productivity and cost competitiveness are likely to coincide with stagnation of
Ireland’s GNP. In the period since 2007, Irish after-tax earnings have actually
suffered significant deterioration compared to our counterparts in Europe. This
deterioration is strongly pronounced for demographically most productive part
of our workforce – those in the 25-45 years of age.
Eurostat data shows that in
2007-2011, after-tax earnings in Ireland have increased only for single persons
with no children earning 50% of the average wage (a rise of 2.3%) and
households with two parents and two children on 100% of the average wage income
and sole earner (up 1.8%). The smallest declines in after-tax earnings occurred
for the category of single person households with no children earning 100% of
the average wage (down 0.8%), families with two earners and no children
bringing in 200% of the average wage in combined earnings (down 0.8%), and
families with similar income (down 0.6%). At the same time, the largest declines
in after-tax earnings were recorded for single persons and families with no
children and earnings of 167% of the average wage (declines in the range of
2.3% and 3.7%). Above-average after-tax earnings drops were recorded for all
other types of households, including families with children on combined
earnings in excess of 133% of the average wage. In other words – younger
households and households with two earners have been the hardest hit by the
recent trends.
With decline in net after-tax
earnings, Irish economy is now facing a number of pressures. Costs of living,
commuting and housing are likely to continue rising in months and years ahead,
driven by the state desire to extract more in indirect taxation and the market
structure that is largely captured by the less competitive state enterprises and
defunct banks. Direct tax burden will also continue to rise, while pre-tax
earnings will fall. These pressures will imply further reductions in consumer
spending and domestic savings. The latter means, among other things, that we
will see renewed pressure on banks (as part of our savings reflects repayment
of household debts) and on domestic investment.
CHARTS:
Box-out:
The latest Community Innovation
Survey for Ireland for the period of 2008-2010 has been released by the CSO,
detailing some very interesting trends in overall innovation activity in Irish
economy. Headline figure shows that 28% of enterprises in the industrial and
selected services sectors had product innovations in 2008-2010, with 33% of
enterprises engaged in process innovations. However, only 18% of enterprises
were engaged in both process and product innovations. Not surprisingly,
foreign-owned enterprises led Irish-owned enterprises in terms of product
innovation 38% to 25%, in process innovation 40% to 30%, and in dual product
and process innovation 25 to 16%. Irish-owned enterprises derived slightly more
of their total turnover from adopting innovations new to the firm, while
foreign-owned enterprises led strongly (more than 2.5 times) in terms of new to
market innovations. This suggests that Irish enterprises strength remained in
adopting new innovations developed outside, while foreign-owned enterprises are
strong leaders in creating new products, services and processes for the market.
Not surprisingly, of €2.5 billion spent on innovation in 2010, just 49% went to
finance in-house R&D. The most innovation-intensive sector of the
MNCs-dominated economy was, not surprisingly Manufacture of petroleum,
chemical, pharmaceutical, rubber and plastic products (72.5% of enterprises
with technological innovation activities), while the most intensive traditional
sector was Manufacture of beverages and tobacco products (91.7%). Did someone
mention booze and pills sciences?
