28/12/2011: ECB: New evidence on public-private pay gap: part 2

As an addendum to the previous post on public-private pay gap study, here are the core results for differences in the pay gap based on various income percentiles:

In the table above, levels of income are referenced to percentiles, so wage differentials are estimated for public-private sector gap per each income percentile. In general, for most countries other than Spain, Ireland and Portugal, "the public sector gap is higher at the lower quantiles and declines along the wage distribution. This is further evidence that the dispersion of the wages in the public sector is much smaller than in the private sector. In this context, public sector employees with low wages earn a higher wage premium relative to higher income employees [again, ex- Spain, Ireland and Portugal]."

In the case of Ireland, the premium lowest for top-earners, second lowest for bottom-earners. The premium rises slightly for 25th percentile and 75th percentile and peaks at 50th percentile. So Irish public sector premium is highest for mid-range earners, lowest for top-range earners, and second lowest for low earners.

28/12/2011: Brain-drain & IRL's knowledge economy

When Government policy-supported brain-drain is compounded by heavily subsidised 3rd level education system, Ireland risks turning into a third world-styled resources supplier to our more dynamic trading partners:

http://www.irishtimes.com/newspaper/ireland/2011/1228/1224309553505.html

HT to @dalkeyhead

That's the 'Knowledge Economy' in the absence of real jobs creation: taxpayers pay for knowledge, private holders of knowledge emigrate to earn private returns, taxpayers pay for more 'Knowledge Economy' boffins and pamphlets... but do not worry - 20 years from now, the IDA will have plenty of new ex-Irish execs in UK, US, Australia, Canada, etc to beg for FDI.

28/12/2011: ECB: New evidence on public-private pay gap: part 1

ECB Working Paper 1406 (December 2011) titled "The Public Sector Pay Gap in a Selection of Euro Area Countries" looks at the relationship between public and private sector wages over recent decades in the light of "the increase in public sector employment in many countries, with relevant implications for the overall macroeconomic performance and for public finances". The study considered ten euro area countries: Austria, Belgium, France, Germany, Greece, Ireland, Italy, Portugal, Slovenia and Spain.

Per authors: "According to national account aggregate data, the wage earned by a representative public sector employee is higher than the one earned by a representative private sector employee in all the countries of this study, except Belgium, France and Germany. In particular, in the period 1995-2009 the ratio of public to private compensation per employee is found to be consistently below one in the case of France, slightly below one in the cases of Germany and Belgium, around 1.1 for Austria, around 1.2-1.3 for Italy, Spain, Greece, Ireland and Slovenia, and above 1.5 for Portugal."

"Available data on union membership – referring to the period 1997-2009 depending on the country - show that union density (measured by the ratio between reported membership and employed dependent labour force) is typically much higher in the public than in the private sector (in the European countries approximately twice as much). Among the countries included in this study, union density rates are relatively high in Belgium (around 50%), followed by Austria, Ireland, Italy and Portugal (in the 30- 40% range) and Germany (27%); it is relatively low in France (about 8%) and Spain (16%)."

The summary of the premium evolution is provided here:

In the chart above, Ireland has the second highest gap after Portugal.

The paper provides a reminder of a number of studies that have examined the public-private sector wage gap in Ireland:

• Boyle at. al. (2004) report wage premia for public sector workers, greater for low-paid workers and smaller for public sector workers at the top of the earnings distribution using microdata from the European Community Household Panel Survey. 
• Foley and O’Callaghan (2009), using micro data from the 2007 National Employment Survey, also find a sizable public sector wage premium, highest at the lower ends of the earnings distribution. The authors use a variety of estimation techniques and control for work place and employee characteristics such as age, education, gender, occupation, etc. However, the authors urge caution in reaching a definitive conclusions on the average public sector premium. 
• Kelly et. al. (2009), using data from the 2003 and 2006 National Employment Surveys, analise the public- private sector wage gap in Ireland. Their results indicate that the public sector pay premium increased considerably from 14 to 26 per cent between 2003 and 2006. Moreover, they also reported that there was significant variation across public service sub-sectors.

The ECB research provides controls for a number of variables that can theoretically explain diferences in pay between public and private sector, such as education as skills proxy and gender,  earnings groupings by percentiles,  and firm size. All are found to retain statistically signifcant public sector earnings premium in the case of Ireland. 

The study also looks at one specific category - Education. "On average workers in “Education” earn much higher wages with respect to workers with similar characteristics in the private sector relative to workers in the other sub-sectors, while workers in the “Health” sector are less at advantage, and as in the case of Germany even at disadvantage with respect to their private sector counterparts. This finding is confirmed on the basis of a formal statistical test..."

And the premium holds when controlling for workers' own education:

So overall, the study finds that: "A large body of literature has analysed the issue using micro-data on single countries. Most of these studies find a differential in favour of public sector workers, even after taking into account some observable individual characteristics. As in the previous studies, our results, referring to the period 2004-2007, point to a conditional pay differential in favour of the public sector that is generally higher for women, for workers at the bottom of the wage distribution, in the Education and the Public administration sectors rather than in the Health sector. We also find notable differences across countries, with Greece, Ireland, Italy, Portugal and Spain exhibiting higher public sector premia than other countries. The differential generally decreases when considering monthly wages as opposed to hourly wages and if we restrict our comparison to large private firms."

There goes one of those "We are not Greece" comparatives that the Irish Government is so keen on. When it comes to pay premium in the public sector, we are in the Club Med (PIIGS) group after all.

26/12/2011: LTRO will not solve Euro banks' problem

As the annus horribilis concludes for the terminally ill, but refused (by the ECB & EU & the respective Governments) death, Euro area banks, the key note of that Mahlerian (the 5^th symphony-styled) Trauermarsch is the LTRO allocation of cheap 3 year €489 billion worth of ECB credit (at 1%) to the European banks. And, thus, the theme for 2012, the second movement in the opus magnum of the Euro destruction, is the looming recapitalization deadline for the said zombies – the end of June.

Alas, the hope that seems to sweep the markets to boost, albeit moderately, Euro area banks valuations – the hope that having the mother of all carry trades can help these banks recover their margins just in time to use ‘organic’ recapitalization path through mid 2012 – is seemingly out of reach.

Firstly, I put ‘organic’ in the inverted commas, since the margins rebuilding on the back of ECB-created artificial liquidity boost is about as organic as performing a puppet show with a corpse is ‘live-like’.

Secondly, the carry trade I am talking about - for those readers of this blog who are unfamiliar with finance – is the artificial exercise of taking cheap loans in one country/currency and carrying funds into purchase of assets in another country/currency. Of course, with nothing but loss making (or near-loss making) assets in the markets of the Euro zone, any banks who borrowed funds in the LTRO will be either buying Government paper (yielding on average, say, 3.0 percent margin on borrowings gives Euro area banks pre-tax uplift of just €7.3 billion in 6 months time (and no, there are no capital gains realizable, since buying today and selling into mid-2012 will leave this paper, at best, capital gains neutral). Thus, to make even a dent in the capital demand, the banks will be needing assets yielding more than double the junkier Euro area sovereign yields, which means carry trade, and all associated currency and asset risks.

Of course, Euro area banks can try to magnify their returns via ECB-offered leveraged carry trades. But unless ECB offers more LTRO-styled longer term operations, doing so at 3mo or even 11mo liquidity supply windows would be simply mad. 

So, having borrowed through LTRO, Euro area banks will purchase Government bonds which then can be used as a collateral for further ECB borrowing. So let us assume that the banks will be buying liquid debt, e.g. Spanish or Italian. The margin earned by banks is ca 2.6-3.5% per annum after they cover the cost of LTRO borrowing. Note, this carry trade will turn loss-making for the bank if the sovereign bonds yields fall below 1% cost of ECB LTRO funds. In my view, this is highly unlikely.

So the whole operation can provide some €14.6 billion annually to the banks in terms of profits earned. And this is pretty much the unleveraged maximum. Nice one, but through June 2012 hardly enough to support banks recaps. Even if EBA deadline is shifted to December 2012, profits from LTRO are nowhere near the required funds to cover recapitalizations. Recall that under 9% Core Tier 1 scenario, euro area banks require something to the tune of €119 billion in fresh capital.

The downside from this conclusion is that the Euro area banks will require, post LTRO either a warrant to die (the preferred option, assuming the death warrant involves orderly shutdown of the insolvent banks) or a public bailout of immense proportion. Given the EU hit some serious trouble coming up with €200 billion for loans to IMF, good luck with that latter option.

23/12/2011: EU - 2013 = Year of Citizens, Rest of Time = Years of Brussels?

So 2013 theme for EU is "The European Year of Citizens". I know, it was proposed some months ago, but...

The challenges for the "Year of Citizens" will be to:

• Raise citizens' awareness of their right to reside freely within the European Union and of how they can benefit from EU rights and policies [Though, of course, if they happen to be Russian-speaking near-majority in some Baltic States, they are not quite 'citizens' and if they happen to be from certain EEC member states, they can reside, but have no right to work in other member states, plus if they live in Ireland, they have a duty to repay banks bondholders in other member states, and if they live in Greece, they have no right to have a referendum on their own economic policies, and... oh, well... the list goes on];
• Stimulate citizens' active participation in EU policy-making [because, as we know it, European 'citizens' are starting to get tired of the farcical nature of governance in the EU, especially when it comes to that pesky democratic deficit (chart below is from Spiegel Online):

• Build debate about the impact and potential of the right to free movement, especially on strengthening cohesion and people's mutual understanding of one another [no comment here, since we are currently living through the period when many member states are starting to put in place measures to reduce that 'free movement']

But overall, did anyone ask the EU Commission and the European Parliament the following question: If 2013 is the year of European citizens, then, pardon me for using foreign turn of phrase here, what the hell were all the previous and will the subsequent years be about? Years of Brussels? 

23/12/2011: Composition of Irish exports to Russia

For those of you who asked: composition of Ireland's exports to Russia, data through August 2011:

This shows pretty decent diversification and the stronger role for indigenous enterprises, especially in Agrifood sector (26.2%, plus some segment of Other category).