Euro Crisis, Causes and Solutions

Tom McDonnell: Despite the developments at last week's EU summit we remain a long, long way from a successful resolution of the Euro crisis. My own thoughts on what should be done are in this TASC discussion paper.

I welcome any comments or feedback.

Guest post by Suzanne Rosselet-McCauley and Adrian Devitt: Restoring sustainable competitiveness

Suzanne Rosselet-McCauley and Adrian Devitt: Competitiveness is one of the most abused terms in modern economics, meaning many different things to different people. Ireland, perceived during its Celtic Tiger years as a star performer in international competitiveness rankings, rose to a peak of 5th place in IMD’s World Competitiveness Yearbook (WCY) in 2000. Considered one of the world’s most prominent indices of global competitiveness, Ireland’s ranking began to fade during the years preceding the financial and economic crisis of 2008-2009.

In our research on national competitiveness, it has become apparent that there exist many different roads to competitiveness and that a “one-size-fits-all” recipe cannot be applied to all countries. It is not only a question of how “competitive” countries are, but rather how they are sustaining national competitive advantages and achieving greater prosperity for their populations, in terms of increasing living standards and human development (health, education, training). Researched by Forfás, the NCC’s Competitiveness Scorecard has reported on these factors over the past decade.

Unfortunately, the drive for competitiveness is often misunderstood as a win-lose battle between firms to gain market share or between nations for export dominance. But for any company or nation, narrowly looking at cost, price or export competiveness will not be enough to deeply impact sustainable profitability or economic development.

So what happened to Ireland’s competitiveness as the country’s ranking declined in the WCY year after year to an historical low of 24th last year? Clearly, as prices and wages climbed during the boom years, Ireland’s price and cost-competitiveness eroded. Infrastructure constraints also grew. But as the boom continued and as debt was built up and property prices skyrocketed, a sense of invulnerability seemed to take over during these “miracle years”. Since 2008, while Ireland’s competitiveness potential has improved as cost competitiveness improved and capacity constraints eased, indicators tracking current economic performance (e.g. unemployment, debt rates) continued to lower Ireland’s overall ranking.

This year, the tide appears to be turning and Ireland’s ranking has improved to 20th place (out of 59 countries). Over the past year, Ireland has benefited from booming exports and sustained inward investment, retaining its place as one of the most attractive locations for multinationals. The improved ranking is also testament to Ireland’s business-friendly environment, in terms of investment incentives, a competitive tax regime, a high availability of skilled workers who are also English speaking and IT competent. For example, in the IMD 2012 WCY, Ireland ranks:

• 1st for the availability of skilled labour
• 1st for the flexibility and adaptability of the population
• 1st for positive attitudes towards globalization
• 1st for investment incentives
• 1st for understanding the need for economic & social reform
• 2nd for a lack of discrimination towards foreign investors
• 2nd for lack of protectionism
• 3rd for patents in force

But what about the future? Will the global crisis be seen as an opportunity to move towards a more sustainable path of competitiveness? Notwithstanding the legacy of the property bubble, Ireland has significant strengths to build on. For example, a significant proportion of Ireland’s exports are classified as complex goods or services (i.e. high value added). The degree of complexity apparent in Ireland’s export profile differentiates Ireland from other peripheral EU economies. While it is essential for Irish competitiveness to continue to pursue cost efficiencies in all sectors of the economy, it is also vital to continue to develop the exporting capabilities of high value, complex sectors and their supply base. The key challenge is to strengthen the foundations for long-term sustainable growth and Ireland’s potential for future competitiveness.


To really get ahead, sustainable competitiveness must be the ultimate objective of a business or national development strategy. This implies the following:

• Improved performance in education, worker training, and retaining talent
• A long-term view towards business and capital investment
• Building innovative capacity by fostering an environment of creativity and knowledge transfer
• Spurring indigenous technology to develop domestic global brands
• Finding an equilibrium between economic gains and societal well-being

Building Ireland’s potential for future competitiveness will require addressing three major challenges: macro economic and fiscal stability, R&D and innovation, and infrastructure. First, a continuing focus on stabilising the banking system and public finances, thereby reducing volatility and uncertainty. It is only in a predictable environment that investors will take a long-term view and seek to improve productivity.

Second, Ireland’s companies need to constantly upgrade and innovate to stay ahead. This requires a continued focus on R&D by boosting expenditure and supporting the transfer of people and knowledge between research and academic institutions and the private sector, as well as the dissemination of this knowledge into innovative goods and services.

And the third bottleneck for sustaining competitiveness is infrastructure. Not only continued investment in basic, physical and digital infrastructure, where Ireland has made good progress, but also addressing the constraints in financial infrastructure, for example by improving access to credit, venture capital for start-ups, and supporting entrepreneurship and small- and medium-sized enterprises.

Lastly, while attempting to tackle the above challenges, it is important not to neglect the country’s social infrastructure in terms of education, healthcare and pensions, while ensuring that the benefits of growth are shared equitably across the population.

If the improved IMD ranking is any indication of Ireland’s comeback, then the competitiveness horizon looks brighter. Having improved four places to 20th – the strongest improvement in a decade - potential exists to improve further. There is also evidence that the Irish have a strong capacity to adapt to difficult and troubling times, as seen in the high rankings (1st) for “understanding the need for economic and social reform” and for the population’s “flexibility and adaptability”. A difficult road still lies ahead but Ireland possesses many of the prerequisites for competitiveness that will help ensure a better future for the next generation.
Authors: Dr. Suzanne Rosselet-McCauley, IMD Fellow, former co-author of the IMD World Competitiveness Yearbook, IMD. Adrian Devitt, Head of the Economic Analysis and Competitiveness, Forfás

The Gloves are Off!

Sinead Pentony: When the Report of the Independent Review of EROs and REA Wage Setting Mechanisms was published on Wednesday, there was a general view that it’s a well researched report that puts forward a set of evidence-based recommendations that aim to “....create a framework within which greater efficiencies and necessary adjustments in payroll costs can be achieved in the affected sectors”. While I may not agree with all of the recommendations, there are certainly plenty of sensible proposals that will lead to benefits for all stakeholder groups. However, IBEC were obviously disappointed that it did not call for the abolition of the JLC system and said that the Review “...was totally out of touch with the need to create and sustain jobs.”

The following day (Thursday), the Minister for Enterprise, Jobs and Innovation published his own set of proposals that aim to pursue the agenda for “radical overhaul”; many of which are at odds with the carefully researched recommendations in the Report. Again, the message was about creating and sustaining jobs. However, the Report makes clear the finding that the balance of evidence does not support the assertion that lowering pay will lead to the creation of more jobs. The problem in the domestic economy is lack of demand - not competitiveness - and the wage cutting agenda will only exacerbate the problems in the domestic economy further. The Global Competitiveness Report 2010-2011 identified our small market size; poor infrastructure; macroeconomic instability and dysfunctional financial markets as factors inhibiting competitiveness.

In the absence of any serious efforts to address the full range of costs of doing business in the domestic economy – commercial rents, waste charges, professional fees, energy costs and the price of food - the focus is firmly on the easy target – low paid workers. The only protection many of these workers have, is the JLC system, but even within this system there is widespread abuse and derogation of responsibilities on the part of the employers. The NERA report shows that only about 20 per cent of investigated firms were compliant with the rules.

In TASC’s Submission to the Independent Review we identified the need to monitor, evaluate and review low paying sectors on a regular basis, which should be used to identify the labour market and competitive impacts of the various wage floors and the equality and poverty impacts of these wage floors. This is how evidence-based policy making works.

In Budget 2011, the budgetary measures included a cut in the minimum wage and the abolition of Section 23 tax reliefs for those renting private accommodation. The former is due to be reversed in the coming weeks. However, the implementation of the latter was postponed, following concerns about the impact of ending the reliefs and that an impact assessment was needed to ascertain the effect of phasing out such reliefs. The Programme for Government (p.23) is also committed to publishing cost-benefit analyses for major infrastructure proposals and “tax expenditure”. All of this points us in the direction of evidence-based policy analysis and formulation, albeit belatedly.

The labour market is central to the economy and any changes therein must be carefully considered. The government now has a well-researched 117 page report on the various wage setting mechanisms. Why would it not apply the same level of rigour to this aspect of the economy that is being applied to other parts of the economy? And why would it ignore the findings in this report in favour of anecdotal assertions that are being portrayed as fact? We must do our best to ensure that the facts win out over fiction, in the interests of evidence-based approaches to policy making and in the battle to protect the incomes of low paid workers

The impact of cost competitiveness in Ireland

Slí Eile: Some assertions abound in the media and among 'informed' economist commentary. These are frequently based on ideology more than fact. Take two popular assertions:
- that public expenditure was 'out of control' in the years immediately prior to the crisis of 2008-2011
- that Ireland was losing export market share in the years immediately prior to the crisis because prices and wages were growing faster than elsewhere
In an article by Daniel Gros ('The Flawed Economics of the Competitiveness Pact' here) the latter assertion is put to the test and found wanting. Gros claims that 'competitiveness indicators by themselves are thus of very limited value in predicting export performance'. Ireland's share of EU27 exports, like that of Greece, Spain and Portugal, was remarkably constant over the period 2000-2010.
Regarding trends in public expenditure - there is no evidence to support the claim that levels were 'out of control' or excessive. Spending tended to track increases in GDP (or GNI) over the period to 2008 - leaving Ireland lagging below EU average levels. Eurostat data on General Government Expenditure shows a dip around in the % of GDP accounted for by public spending with a level of 41% in 1995 and 42% in 2008. After 2008 a number of factors kicked in including the escalating cost of social welfare bill due rising unemployment as well as the banking bailout in 2009/10.

Economists on Ireland's export performance - more sad stories

Proinnsias Breathnach: One thing that has always struck me about Irish economists is that, despite the importance of foreign direct investment and international trade to Ireland’s economy, they actually know very little about the activities of the transnational firms in question, or the structure of Ireland’s foreign trade and, above all, about the factors which attract foreign firms to Ireland and allow them to use Ireland as a base for serving external markets.

Rather than conducting real research in these areas, most economists who write on these topics appear to draw on undergraduate textbook models of how markets operate – models which in turn were originally devised to explain the kinds of competitive markets for commodity-type products (clothing, food, furniture) which were fairly typical of the British and US economies in the 19th century. Subsequent developments, such as industrial concentration, globalisation, rising living and educational standards, advertising and marketing and technological change, appear to have bypassed many of these people entirely.

Thus, a few weeks ago, we had Anthony Leddin of the University of Limerick (writing in The Irish Times) postulating trends in Ireland’s foreign trade which anyone with knowledge of this area would have realised right away were completely wrong. More recently (January 28), and again writing in The Irish Times, former Central Bank Chief Economist Michael Casey wrote: “At present the only bright spot in the economy is the output and exportation of pharmaceutical products”. This is an extraordinarily uninformed statement for a person of this status to make. Of the nine broad product categories into which the CSO divides Ireland’s merchandise exports, eight experienced growth in nominal export value in the first ten months of 2010 compared with the same period in 2009. Of the total growth in these eight categories, pharmaceutical products accounted for less than half (46.5%).

The growth in total merchandise exports, in turn, accounted for only one half of the overall growth in exports (including services) in the first three quarters of 2010. The growth in exports of computer services in this period exceeded that in pharmaceutical products by 24 per cent. Many economists have been unable to internalise the fact that services exports exist at all, never mind that they have been the main growth sector in Irish exports for many years and, in 2009, accounted for 46.5% of total exports. In the five years to 2009, exports of both computer services and business services grew much more strongly than exports of pharmaceuticals. In 2009, exports of both computer services and business services exceeded exports of pharmaceutical products in value terms.

In that year, these three sectors, along with organic chemicals, accounted for over half of Ireland’s total exports. If we throw in insurance & financial services, food & beverages and office & data processing machinery, the proportion rises to almost three quarters. If one were seeking the key to Ireland’s international competitiveness, one should be looking at why these seven very disparate sectors are able to use Ireland as a successful base for serving external markets.

But this would require some real research. Instead, our economists reach for simplistic and largely irrelevant statistics which are both readily available and tend to confirm deeply-entrenched prejudices. We got a good example of this in an article on Ireland’s competitiveness by The Irish Times’s chief economics journalist, Dan O’Brien, in the issue of February 4 last. While acknowledging that there are many ways of measuring competitiveness and that the National Competitiveness Council employs more than 100 competitiveness indicators in its annual reports,O’Brien then devotes most of the rest of his article to the old diehards – prices and labour costs.

Irish economists have an extraordinary tendency to rely on the EU’s harmonised index of consumer prices (HICP) as a measure of competitiveness, even though its relevance to Ireland’s export competitiveness is not immediately obvious – it is hard to see what bearing the price of a meal or a CD player has on the competitiveness of the organic chemicals or software sectors. Nevertheless, O’Brien regards the fact that Ireland’s HICP fell relative to the rest of the EU between late 2008 and early 2010 as evidence of Ireland “regaining” competitiveness.

O’Brien then suggests that trends in economy-wide unit labour costs (the ratio of wages to net output) are a better indication of Ireland’s improved competitiveness. However, the fact is that the vast majority of the Irish workforce are not engaged in export activity and, again, it is hard to see how the unit labour costs of a waitress or CD player salesperson have a bearing on the competitiveness of the main export sectors identified above. While Ireland’s economy-wide unit labour costs have tended to rise relative to the rest of the EU over the last ten years, the opposite has been the case in unit labour costs in manufacturing, the great bulk of whose output is exported. Yet, while the latter are to be found in the same page in the OECD website as the former, they are rarely, if ever, quoted by Irish economists.

There are no comparable data for export services, but the Forfás Economic Impact surveys indicate that payroll costs as a proportion of value added in foreign-owned export services (which account for 95% of the total) fell from 19% in 2000 to 9% in 2008 – a fall of over 50% in unit labour costs.

This is not to say that labour costs are important (never mind crucial) in the competitiveness of Ireland’s main export sectors. If general labour costs were a key determinant of competitiveness, then one should expect exports in all sectors to be influenced by labour cost trends. However, Ireland’s main export sectors have been very variable in their export performance, and there is no evidence that this variability has been influenced in any way by labour cost trends. Between 2000-2006 (the last year for which the relevant data are available), the chemicals & pharmaceuticals sector experienced volume output growth of 50%, despite a rise of 50% in the share of costs accounted for by pay (up from 12.6% to 18%). In the electronic components sector, there was a more modest rise in the labour share of costs from a lower base (up from 13.1% to 16.4%) yet production volume fell by 7%. In the office machines and computers sector, a fall in labour’s already very low share of total costs (down from 4.1% to 3.5%) produced volume growth of 22% - much more modest than that experienced by chemicals & pharmaceuticals.

The key point is that the idea of Ireland Inc. gaining or losing competitiveness is meaningless. Ireland’s exports are dominated by a small number of sectors whose characteristics are extremely varied and whose export performances are equally varied. Adding up these performances and then concluding from the total that Ireland is becoming more or less competitive is pointless. Over the last ten years Ireland has experienced strong export growth in a range of export services, and in pharmaceuticals and medical devices, modest growth in chemicals, and, overall, a sharp fall in exports of electronics hardware. A wide range of factors account for this export variability, of which labour costs play, at most, a minor role. In compiling its Global Competitiveness Index, the World Economic Forum employes no less than 113 quantitative criteria; in Ireland’s case labour cost factors account for less than two per cent of the total value of the competitiveness index.

The economists’ disconnect from the real world is nicely demonstrated from a passage towards the end of Dan O’Brien’s article. Referring to evidence that average productivity in Ireland has been raised by the collapse of the low-productivity construction sector, he suggested as an example that “a bricklayer produces less than the average assembly-line worker or office drone (sic)”. Productivity in the construction industry is indeed low when compared with manufacturing or business services, but O’Brien’s choice of bricklayers for his example was surely unfortunate. Assuming that earnings bear some relationship to productivity, in 2006, when industrial production workers were earning €601 per week, clerical and secretarial workers €540 and administrative civil servants €819, the average weekly earnings of all skilled construction workers came to €877 and there was one report of bricklayers at that stage earning over €3000 per week! The company making these payments was also reportedly paying its Turkish labourers €2.50 per hour. They might have been a better choice for O’Brien’s example.

'Job Pact', not 'Competitiveness Pact'

Tom McDonnell: Useful post (here) from Andrew Watt. He looks at the latest uninspiring growth figures in Europe (0.3% quarter-on-quarter in the euro area and just 0.2% in the wider EU27). We cannot assume such anaemic growth will be improved upon as austerity bites down in 2011. Weak employment growth will be the upshot.

One interesting point relates to the newly fashionable idea that increased ‘competitiveness’ is the solution to the jobs crisis. Andrew notes that the Euro area has actually maintained a balanced trade account virtually throughout its existence and achieved a trade surplus in 2010. If the Euro area had a severe competitiveness problem it would surely be reflected in the trade statistics.

Ireland of course has the second highest (http://www.finfacts.ie/irishfinancenews/article_1021642.shtml) trade surplus in the whole of the EU. Ireland has many problems but competitiveness does not appear to be at the top of the list. Worth bearing in mind as the attacks on the minimum wage and other wage floors continue...

Economists’ disconnect with the real world not just confined to Ireland

Proinnsias Breathnach: The disconnect between the economics profession and the real world of business and commerce which is so apparent in Ireland is not, apparently, confined to this country. In an article on the strong performance of the German economy in 2010 in last Friday’s (January 14) Irish Times, Derek Scally quotes two German economists who attribute this performance to greater labour flexibility and associated lower labour costs. Scally appears to have accepted this viewpoint, given the article’s subtitle: “A decade of labour and welfare reform laid the ground for Berlin’s latest success story”.

Yet the one example from the real world of business cited in the article gives an entirely different reason for Germany’s export growth. Daniel Dreizler, partner in a producer of high-tech gas burners for boilers, attributes the firm’s success to “long-term thinking and consistent investment of 5 per cent of turnover in research and development of high-tech patents and products”. Dreizler goes on: “We aren’t the ones who can offer a standard product cheaper; we will never manage that…We can offer a quality product that is more efficient and offers technical advantages, and argue for the price premium on that basis”.

Scally describes Dreizler as a “classic example” of “all that’s right with the German economy”. Yet the rest of his article highlights labour market and welfare reform as the key to Germany’s renewed economic success, even though Dreizler makes no reference at all to these. Is it too much to expect joined-up thinking in what purports to be Ireland’s leading serious newspaper?

Constant repetition does not make an argument correct

Proinnsias Breathnach: Garret Fitzgerald’s Saturday articles in the Irish Times have become so repetitive as to be hardly worth reading anymore. Last Saturday he was at it again, pushing two of his favourite hobby horses whose correctness he seems to take for granted but which, in one case, is quite questionable and, in the other case, is plain wrong.

The latter refers to Dr. Fitzgerald’s repeated assertion that Ireland’s export competitiveness was undermined in the early 2000s (due mainly to government-induced inflation) and that, that as a result, Ireland’s share of global exports fell by one fifth.

In fact, the available data directly contradicts these assertions. OECD data show that unit labour costs in Irish manufacturing (most of whose output is exported) fell by nine per cent between 2000-2007. Very few of our main trading partners bettered this, and overall Ireland’s position improved vis-à-vis the Eurozone, the EU and OECD.

The OECD does not publish similar data for export services, but we can compute from Forfás data that unit labour costs in Irish export services fell by a quarter in the same period. This presumably was better than most of our competitors, as Ireland’s share of global services exports more than doubled in this period (from 1.23% in 2000 to 2.75% in 2007.

Overall, according to World Trade Organisation data, Ireland’s share of global exports of goods and services rose from 1.21% in 2000 to 1.235% in 2007. I presume that Dr. Fitzgerald’s assertion of a fall in global export share refers to merchandise exports, but these only accounted for just over one half of Ireland’s total exports by 2007. Even then, most of the fall in merchandise exports was confined to a single sector (office and data processing equipment) where special circumstances applied viz. the dot.com crash of 2000-1 and the emergence of China as a major low-cost competitor in this sector which has impacted negatively on the export share of most western economies.

Garret Fitzgerald’s second hobby horse is his argument that Ireland’s system of multi-seat constituencies is responsible for the preoccupation with local affairs of Irish TDs, due to the competition it engenders between TDs from the same party. It would seem more obvious to me that the local focus of our TDs arises from the highly-centralised nature of Ireland’s administrative system which means that local residents are forced to go to their TDs to seek intercourse with this system. In most other European countries most everyday public services (health, education, social welfare, community care and facilities) are the responsibility of local government, leaving parliamentarians free to devote their attentions to matters of national interest.

Any attempt at political reform which fails to address this basic structural problem in Ireland’s political/administrative system is, in my view, doomed to failure. Garret Fitzgerald favours a system whereby Dáil Éireann would be elected by a combination of local representatives and a national list system. I would argue that we should eliminate local representation entirely from our lower house of parliament. Instead – if it is to be retained at all – the Seanad should be made up of local representatives whose main function would be to review legislation arising the the Dáil for its possible local impacts. This would give it a more focused and clear-cut function than it has at present.

Anthony Leddin on Ireland's export competitiveness

Proinnsias Breathnach: Last Friday’s Irish Times (November 12) contained an article by Dr Anthony Leddin, Head of the Department of Economics at the University of Limerick, which raises further serious questions about the quality of advice on economic policy emanating from Irish academic economists.

The basic thrust of the article was that Ireland’s international competitiveness declined seriously for most of the 2000s due mainly to rising costs, but that a fall in costs and wage restraint since 2007 helped reverse this trend. Leddin concludes that a deflationary budget, through further containing wage and other costs, will work to Ireland’s long-term advantage by enhancing competitiveness.
Leddin cites trends in what he terms net exports (i.e. exports minus imports) in support of his argument. He states that net exports fell from a surplus of €226 millions in 1999 to a deficit of €10.124 billions in 2007 (reflecting falling competitiveness) but then recovered to a deficit of €4.85 billions in 2009 (indicating improving competitiveness).

Even if these data were accurate, they would indicate a highly unlikely speed of response on the part of trade volumes to changes in costs. However, much more seriously, not only are the data inaccurate, but the trends derived from the data are the opposite of actual trends in net exports. In 1999, according to CSO Balance of International Payments data, total exports of goods and services exceeded imports by €12 billions, not the €226 millions claimed by Leddin. Between 1999 and 2007, the excess of exports over imports increased by €6.7 billions (to €18.7 billions), directly contrary to the fall of €10.3 billions postulated by Leddin.
Over the next two years Ireland’s trade surplus grew by a further €9 billions to €27.7 billions (according to Leddin there was a deficit of €4.85 billions in 2009).
The data cited by Leddin refer, not to net exports, but the so-called “balance on current account” which includes not only net flows of export revenues but also net flows in factor income and transfer payments. By far the biggest component of the latter elements is net direct investment income i.e. income earned by transnational firms from overseas operations.

In 1999, the net outflow of direct investment income came to €13.5 millions, which exceeded the trade surplus. However, a surplus in other investment income gave a small surplus in the overall current account of €226 millions which is the figure given by Leddin for the trade surplus. By 2007 the net outflow in direct investment income had doubled to €26.3 billions, €7.7 billions greater than the trade surplus. Deficits in transfer payments and other income flows produced the overall current account deficit of €10.1 billions which Leddin presented as the trade deficit.

Over the next two years the net outlow of direct investment income rose by €2.6 billions but a much sharper rise in the trade surplus (of €9 billions) produced the substantial fall in the current account deficit which Leddin presented as a fall in the trade deficit.

Overall, therefore, where Leddin claimed that Ireland’s net exports fell by €10.4 billions between 1999-2007, they actually rose by €6.7 billions. This, of itself, undermines Leddin’s argument that Ireland’s competitiveness deteriorated in this period. Indeed, the key factor in the difference between Leddin’s purported net export data and the true position, i.e. rapid growth in the net outflow direct investment income, is itself an indicator of rising rather than falling competitiveness, to the extent that it reflects rising profitability among foreign firms based in Ireland.

It is shocking that a senior academic economist would make such a glaring mistake in the presentation of basic macroeconomic data. What is more disturbing is that this is just the latest instance of misinterpretation (or non-interpretation) of data by a wide range of economists in support of an erroneous view that Ireland’s competitiveness was undermined in the first decade of the current century. I have already refuted this view in some detail in a series of articles on the Ireland After Nama website (May 2010).

Almost unanimously, these economists further attribute this postulated loss of competitiveness for the most part to rising labour costs (itself not true, at least insofar as it applies to Ireland’s main export sectors). The idea that international competitiveness is primarily dictated by labour costs is extraordinarily simplistic (and of course untrue, at least for the markets in which Ireland participates).

What is even more extraordinary is how widely held this idea is among Irish economists. It is a view very firmly held, for example, by Alan Aherne, Brian Lenihan’s economic advisor who wrote in the Sunday Tribune (January 11, 2009) that “if we are to regain competitiveness, we have to do it the difficult way – through wage cuts” and followed this up on RTE’s Morning Ireland programme (January 19, 2009) with the view that “the only way to improve export competitiveness is through wage cuts in the export sector”.

This immediately rules out enhanced productivity, design and performance improvement, technological upgrading, marketing and branding, to mention just a few of the standard approaches used by firms to improve market share in the real world. If the Irish government’s economic policy is based on views and analyses of the level of accuracy and sophistication indicated here, then there really is little hope for us at all.

Minimum wage - facts, fiction and flights of fancy

Sinéad Pentony: The minimum wage rate is €8.65 per hour and it has been frozen since 2007. The introduction of the two per cent income levy in the 2009 supplementary budget resulted in an effective cut to the minimum wage reducing it to €8.48, because if your income is greater than the minimum threshold of €15,028 per year or €289 per week, you pay the levy on the full amount of your income. There have recently been calls by the Restaurant Association of Ireland (RAI) for JLC rates to be reduced to the minimum wage level, and from other business lobbies for a reduction in the minimum wage by one euro.

It was in that context that TASC made a presentation to the Oireachtas Joint Committee on Enterprise, Trade and Employment on ‘The Minimum Wage’. TASC’s evidence demonstrated that any reduction to the minimum wage would exacerbate the deflationary situation and have a negative impact on the public finances. In the media debate following TASC’s submission, the business lobbies focused on the cost of the minimum wage and how it is ‘unsustainable’, ‘preventing businesses from hiring’ and ‘a major contributor to a loss in competitiveness’. Once again, it’s important to identify the facts from the fiction in relation to the minimum wage and to look at the latest evidence on competitiveness.

Despite what you may read or hear, the minimum wage rate is not the second highest in Europe for the following reasons:

1. First, when comparing minimum wages across a number of countries you can only do so by taking the Purchasing Power Parities into consideration i.e. calculating how much you can buy with your minimum wages. This is done by expressing the minimum wage in terms of a common unit called the Purchasing Power Standard (PPS). When expressed in PPS terms, Ireland’s ranking drops from second to sixth place, reflecting our higher cost of living. Ireland’s monthly minimum wage is €1,152 in PPS. The UK is in fifth place with a monthly minimum wage of €1,154 (in PPS) and France in fourth place with a monthly minimum wage of €1,189 (in PPS)(details here).

2. Second, Eurostat data calculates wages per month. Ireland’s monthly rates are calculated on the basis of a 39 hour week, France on the basis of a 35 hour week and the UK on the basis of the 38.1 hour week. If we differentiate for the number of hours worked in the three countries we find that the hourly minimum wage is €7.84 (PPS) in France; €6.99 (PPS) in the UK and €6.82 (PPS) in Ireland.

3. Third, the data only refers to those European Members that have statutory minimum wages. This means that the dataset does not include the Scandinavian countries. Collective bargaining is used to set minimum wages in these countries and an October 2008 study by Swedish economists showed that Sweden, Finland and Denmark all had higher hourly minimum wages in 2006 than Ireland, as did Norway which is not a member of the EU.

4. Eurostat also calculates the minimum wage as a per cent of average monthly earnings. The minimum wage in Ireland was 42 per cent of average industrial earnings in 2008, which puts Ireland in ninth place in the EU, or in twelfth place if we include the corresponding 2006 percentages for the Scandinavian countries

When calculating the cost of employing a person, it is more accurate to look at the overall cost of labour which is made up of labour and payroll taxes (PRSI). Ireland has one of the lowest levels of employers’ social protection contribution in the OECD. The Irish rate (10.8 per cent) is significantly lower than the OECD average (15.2 per cent) and the euro area average (27 per cent), which reduces the total cost of employing workers in Ireland. The hospitality sector is the largest employer of low wage workers and labour costs in Ireland in this sector are the third lowest in the EU 15. Only Greece and Portugal had lower costs per employee than Ireland.

When we look at the facts in the cold light of day it is clear that the minimum wage is not out of step with other European countries and when we consider the total costs of employing people, Ireland is indeed very competitive. However, if the minimum wage is causing serious problems for businesses, surely it would be highlighted in any analysis of competition?

Last week the National Competitiveness Council published its annual report on competitiveness for 2010, and it demonstrates that the minimum wage is not a factor impacting on business’s capacity to survive the current challenging trading environment. They found that Ireland’s cost competitiveness has improved considerably for a range of key business inputs such as energy, property and a number of business services. However, the areas where key inputs in Ireland remain relatively expensive include broadband, waste disposal and legal fees. There is no mention of the minimum wage being prohibitive for business ... and in fact the report found that “Irish salary levels are broadly in line with the euro area average across the benchmarked occupations”(p.22.)

Business lobby groups have also been arguing that the minimum wage is preventing them from hiring, and that the costs associated with hiring minimum wage workers is putting business under pressure. This argument is not supported by a single shred of evidence. In fact, the evidence supports the opposite – that the minimum wage has little or no impact on employment. David Metcalf at the London School of Economics undertook empirical research and a wide ranging review of the literature in 2007 and found that the British National Minimum Wage has little or no impact on employment (see also here).

There is no doubt that the recession has impacted on businesses and has led to many businesses having to close their doors and cease trading. However, these difficulties have not been caused by the minimum wage. Factors such as access to credit, high commercial rents, professional fees, waste charges, the price of food and the collapse in demand, in particular, have had a devastating effect on the SME sector. These are the factors that need to be addressed to support businesses in these difficult times – rather than an unsubstantiated attack on the lowest paid workers in our economy.

Proinnsias Breathnach on Ireland's export competitiveness - myths and facts (III)

Part III of Proinnsias' paper is now available here; click here for Parts I and II.

Proinnsias Breathnach on export competitiveness - myths and facts

Over at Ireland after Nama, Proinnsias Breathnach is taking an in-depth look at the myths and facts surrounding the issue. Part I of his three-part paper is available here, and Part II here. A link to Part III will be posted shortly.

ESRI commentary

Paul Sweeney: In his latest book, “Freefall: America, Free Markets, and the Sinking of the World Economy,” Joseph Stiglitz slams the Irish government’s attitude to international cooperation on dealing with the financial crisis. He quotes disgraced former Minister Willie O’Dea, who boasted that Ireland can be a free-rider on the back of other economies’ stimulus packages.

The book, as its title indicates, is a fierce attack on how the adherents of free market economics brought the global economy to its knees. Stiglitz is scathingly critical of the conservative (free market) view and argues that it is far better to raise taxes on those who can afford them than cutting expenditure and welfare in a depression.

It is again deeply disappointing that an august body like the ESRI continues to devalue its otherwise excellent analysis and research by equating wage movements with “competitiveness.” A cursory glance at the reports issued by the National Competitiveness Council would demonstrate that the issue of competitiveness is far more complex than wage movements. (See for example, the NCC’s Benchmarking Ireland’s Performance, posted below, where wage costs, unit labour costs, etc. are compared and not found to be as vital as some would have us believe, p59-63).

A clear understating of the complex issue of competitiveness is vital if we are to get ourselves out of this deep hole.

It is also deeply disappointing - and perhaps disingenuous - that the ESRI and many other conservative economic commentators, who are “wage movement obsessives,” neglect to look at comparative international labour costs. Could this be because Ireland, in spite of rises in recent years, is still down the list on total labour costs? And what about Irish productivity? Not booming in recent years, but still high.

The ESRI has been quite obsessive about falling wages in the private sector. In its latest report, it admits that “there was no conclusive evidence of falls in hourly earnings in the private sector.” Yet it desperately wants such cuts in wages – to fit in with its crude wages=competitiveness model. In spite of the evidence to date, it then predicts “our expectation is now that wages across the economy will have fallen by 2 per cent in 2009 and that they will fall by 3 per cent in 2010 and by a further 1 per cent in 2011.” However, this will be due largely to the imposed cuts in public sector earnings and reduced working hours all over the private sector. They got it wrong so far on wages in the private sector, and maybe they will be wrong again on this projection.

In fairness to John Fitzgerald of the ESRI, some time ago he said that the justification for the cuts in public sector wages then being mooted in Government was weakened by the fact that private sector earnings (per hour - the way to evaluate such movements) had not fallen. This is still the case.

The ESRI says that “our forecasts suggest that labour’s share of GNP will fall from 54.6 per cent in 2009 to 50½ per cent in 2011. This demonstrates that we are optimistic with respect to the competitiveness challenge which built up in the years leading up to the economic collapse.”

This fall in labour’s share of national income, of course, means a greater share for capital, including the banks. What is interesting is the simplistic tie-in of falling workers’ incomes with improved “competitiveness”. Why would one be so “optimistic” when the fall in wages will further reduce plummeting domestic demand and, thus, employment?

The ESRI report itself shows how consumption fell by 7.2% in 2009, and while they hope it will fall by only 1 per cent this year, they seem to be doing their best to cheer on a greater reduction engendered by pro-cyclical, deflationary polices.

Today’s retail figures are not good when one strips out the state subsidies to car buyers. The fall is a substantial -6.8% in the year, up from under -3% in 2008.

Investment, they also tell us, collapsed by a staggering 30% last year, and they take comfort in that it will only fall by a massive (is that smaller than staggering?) 20% in volume terms this year. Imports have fallen so much - due to reduced earnings and increasing joblessness - that the balance of payments is improving substantially. This is also aided by the very strong performance of Irish exports (why have exports done so well, if Irish wages are so high?). With no jobs policies, a quarter of a million more people (244,000 per ESRI) will be out of work at the end of this year than just two years ago. Thus, demand will fall further. Why is the deflationary impact of government policies not seriously considered by the ESRI?

Yet if one reads the report, one can see that the collapse in the banks, (the ESRI’s own figure is a gross cost of €73bn in taxpayer bailout) and and the fact banks are still not lending to small businesses etc., are the real issues hitting competitiveness.

Perhaps the ESRI should be more precise in its use of English and talk of “wage competiveness”. It should perhaps really be “wage movements”, if one is not including productivity and the impact of exchange rate movements. This is a much more precise definition - more accurate and informative. But perhaps less ideological?

The ESRI commentary admits it got it seriously wrong on the cost of the public bailout of the banks. “The revelations in respect of the scale of losses in Anglo Irish Bank and the consequent needs for recapitalisation were well beyond anything that we, like many others, (but not all) had anticipated.”

It predicts that the net cost of the bank bailout will cost Irish workers and other taxpayers a staggering €25bn. This is 80% of this year’s total tax receipts of €32bn. And it could be much more. This is what is really hitting our competitiveness in my opinion! Why is this issue dominating media? Because it is the key economic issue. Not wage movements.

The optimism regarding a hoped-for recovery of 2 or 3 per cent growth next year pales significantly when one realises that the Irish economy will be a huge one-fifth (20 per cent) smaller (GNP) this year than at its peak in 2007.

Competitiveness indicators

The National Competitiveness Council is currently preparing the 2010 edition of Benchmarking Ireland's Performance. In 2009, the Council used approximately 140 indicators to see how Ireland compares internationally on, for instance, living standards, export performance, prices and costs, productivity, innovation and infrastructure. Now, in the run-up to the 2010 Report, they are seeking suggestions regarding additional/alternative internationally comparable indicators that could further our understanding of Ireland's relative competitiveness. Anyone aware of such indicators who would like to propose them for inclusion should e-mail ncc@forfas.ie. Further information is available here.

Exports 'boosted by productivity'

Rory O'Farrell: An interesting article appeared in the Irish Times that I think was missed by a lot of people.

Dan McLaughlin of Bank of Ireland said

"It is true that Irish hourly earnings in manufacturing have risen by 69 per cent over the past decade, against a 39 per cent rise in our main trading partners, but Irish productivity has also outpaced the competition, with the result that Irish unit labour costs in manufacturing have fallen 14 per cent relative to our trading partners over the past decade, according to Central Bank data."

Different versions of the article appeared in the breaking news section and the finance section.

This is more evidence that the government got its diagnosis wrong, and is administering medicine for the wrong condition.

Should countries cut wages?

Rory O'Farrell: The current financial crisis is special in two main respects. The first and most obvious is the size and scope of the worldwide recession, leading to the first decline in global output since World War II. The second reason is that this is the first major crisis since the introduction of the Euro currency. The crisis has hit some countries harder than others, and some have lost competitiveness in the aftermath of their credit bubbles. In the past, when countries were faced with a recession and a decline in their competive position, one policy option was to devalue their currency. This made their exports cheaper and boosted their economy. However, with the introduction of the Euro, this was no longer possible for Euro Area countries, and some countries (such as Ireland) have attempted a ‘simulated devaluation’ (1) by reducing nominal prices and wages. In addition to the Eurozone which formally contains 16 countries; the three Baltic countries, Denmark and Bulgaria have their currencies pegged to the Euro, with Latvia and Denmark allowing a fluctuation of no more than 1 per cent. While this ‘simulated devaluation’ has already been applied in Ireland and the Baltic countries, pressure is being placed on southern Eurozone countries such as Portugal, Greece and Spain to follow a similar approach. Also, across Europe some employers may try to reduce wages as their firms are genuinely in serious financial trouble, and other profitable firms may simply try to take advantage of the labour market uncertainty in order to reduce wages.

Two main arguments have been put forward in favour of pursuing a policy of wage cuts.

The first is to cut public sector wages in order to improve the public finances. Some countries that had experienced credit fuelled booms prior to the recession had accrued structural deficits. This was because the credit boom gave the illusion that countries were on a sustainable growth path, and governments cut taxes or increased spending above a sustainable level. Since the credit bubble has burst affected governments are trying to close the deficit by increasing revenue by increasing taxes or by cutting spending and public sector wages. Governments must be careful not to further reduce demand but cutting the wages of those on lower incomes, who tend to spend a higher proportion of their income. Also reductions in structural deficits can be partially offset by increase capital spending, increasing countries’ potential for long-term growth.

The second main reason given for reducing wages is to ensure a competitive ‘simulated devaluation’(1). Prior to the introduction of the Euro, when countries were affected by a recession one available policy option was currency devaluation. This policy was followed by several European countries in the early 1990s and in 1992 lead to the collapse of the European Exchange Rate Mechanism (ERM). When a country devalues its currency the price of its exports to foreign markets falls. This causes its exports to be more attractive relative to competitors, leading to increased employment in the export sector. The price of imports also rise however, so consumers spend less on imports (perhaps substituting imports for domestically produced goods) as their real incomes decrease.

In parlance, with a ‘simulated devaluation’ rather than actually devaluing the currency, its effects are simulated by reducing all prices and wages in the economy. The aim is that by reducing nominal unit labour costs, and the price of other inputs, the output of firms will be more price competitive, boosting net exports. In practice however it is wages that are targeted rather than other prices such as prices for consumer goods, or intermediate inputs to businesses such as rents and energy costs. So whereas with an actual devaluation the burden is spread across the economy (though borne most by those who spend a large proportion of their income on imports) with a simulated devaluation it is workers who bear the greatest burden. As workers tend to spend a higher proportion of their income than other groups, targeting workers incomes will suppress domestic demand to a greater extent than an actual devaluation, exacerbating the deflationary pressure.

Table 1 (to improve legibility, click on table and then click again to zoom)

Table 1 gives a ranking of the relative competitiveness for real and nominal unit costs in the EU. Though nominal unit costs are frequently used for cross country comparisons they ignore that in high wage economies, firms often also benefit from high prices for their output, and high profits. Nominal wage costs would be valid for comparing the wage competitivenss of export sectors across countries if data on wages and price levels specific to the export sector was available. However, this is not the case. Real unit costs are the more relevant figure for cross country comparisons as they account for differences in the sale price achieved by firms. Real unit labour costs are identical to, the perhaps more intuitive, labour share of income, and is calculated by the formula

leading to the price index cancelling, and then adjusted for the numbers of self employed in the economy. For nominal wage costs the formula is given as

and an adjustemnt for the numbers of self employed in the economy. We can see here the crucial role of the overall price index in affecting nominal unit costs.

Table 1 compares real and nominal unit labour costs in 2003 and 2007. Eurostat’s Comparative Price Levels are used as the price index. The years 2003 and 2007 are chosen to examine changes in competitiveness from the year of accession of the New Member States to the EU and the peak of the credit fueled boom. Special attention should be paid to the Baltic States and Ireland, the countries pursuing a ‘simulated devaluation’. Between 2003 and 2007 these countries (except Lithuania) experienced a competitive drop in position with Latvia switching from 2nd to 10th position. Perhaps what is most striking however is that even at the peak of the credit boom all these countries were in the top 10 in terms of real unit costs. Workers were gaining a smaller share of production than workers in Germany, which has been held up as a model of competitiveness (The Economist, 2010). Looking at nominal unit costs (which are of more interest to export orientated firms) we see that these four countries, excluding Lithuania, experienced a decline in comptitveness in terms of nominal unit costs (4), with Ireland moving from 18th to 22nd place. The huge difference in Ireland’s comparative position when looking at real and nominal costs is due to the role of of non-wage factors in the price index, such as prices for rent, material inputs, and the supernormal profits of some firms. This would suggest that rather than focusing on wages, policy makers should focus on how non-wage costs are affecting competitiveness (5). However, policymakers are focusing on wage cuts to improve competitiveness rather than other factors.

Notes:

(1) See Weisbrot and Ray (2010) for a detailed description of Latvia’s simulated devaluation and its negative effects.
(2) and (3) - see Table 1
(4) It should be noted that both real and nominal unit costs are averages for the entire economy, and do not relate specifically to the export sector, where productivity is usually higher.
(5)Wages are just one dimension of international competitiveness, and absolute wage levels are not included in the World Economic Forum’s ‘12 pillars of competitiveness’ (Sala-I-Martin, et al, 2009, pp4).

Really, McCoy?

Michael Burke: In yesterday's Irish Times, IBEC's General Director Danny McCoy said wages increased much more rapidly in Ireland than in other countries in the Euro Area during the period from 2002-2008, precipitating a serious decline in competitiveness.

“As a result, unit labour costs increased by 31 per cent in the period, compared with an increase of 9 per cent in the euro area,” he added. “In a single currency, there is no currency depreciation option to restore lost competitiveness.
“This can only be achieved by unit cost reductions, brought about by a combination of pay reductions and productivity gains.”

Mr McCoy seems to be referring to the EU Commission's Euro Area Report, and its statistical annex, which tends to group data in five-year periods, and does so from 2002 to 2006, while also providing data for later years individually. However, while these do indeed show Ireland's labour cost rising by 30.9% over those years, the average rise for the Euro Area was 13.7%, not 9% as stated. (Perhaps the mistake made was to leave 2008 out of the equation for the Euro Area average, since then the total is 9.9%).

But these are nominal increases in unit labour costs, not real costs. In the table below that one (Table 28) these are also provided. On this measure, real unit labour costs in Ireland (nominal costs divided by the GDP price deflator) rose by 9.7%, nearly all of that coming in 2008 as output plumetted. The cumulative rise in the six prvious years was just 2.8%. And the average real chage in unit labour costs in the Euro Area was -2.7% 2002/08.

However, there was also a difference in the rate of growth in productivity. Irish productivity grew by 11.7% in 2002/08 compared to a rise of 7.4% in the Euro Area as a whole. So, Ireland's productivity rose by 4% compared to the Euro Average over the period (111.7/107.4) while Ireland's real relative unit labour costs rose 5.75% prior to the recession (102.8/0.973). According to EU estimates and forecasts for 2009/10, the overwhelming bulk of this modest relative change is already being corrected, 3.8%.

Of course, none of this tells us anything about the absolute levels of costs, or relative costs. Still less about competitiveness.

But the trends in the external accounts do highlight relative changes in competitiveness. Over the period 2002 to 2008, exports of goods and services grew at exactly the same rate as those from the Euro Area as a whole, while they fell by 3.4% in 2009, compared to a 14.2% fall for the Euro Area. Imports also grew at exactly the same rate as the Euro Area 2002 to 2008 and fell by 8.5% compared to 12.5% for the Euro Area as a whole in 2009. This less pronounced decline in imports is associated with the much stronger export performance; as everyone knows, a large proportion of Ireland's imports are for re-export.

There is nothing in these data to support the IBEC assertions that rising unit labour costs have led to a loss of competitiveness. Despite that, the clamour for lower wages is unabated.

Perhaps, if Mr McCoy remains anxious on the issue of competitiveness, he could suggest to his IBEC members they address its key determinant, namely investment? Investment in equipement has fallen by 37.6% in the last 2 years in Ireland, compared to a 16.6% fall in the Euro Area as a whole.

Competitiveness myths ...

"There is a real danger that, encouraged by the economists’ chorus on the need to cut costs as the way to get us out of our current economic troubles, the government will actually undermine Ireland’s long-term competitive position through cutbacks in research and education (in fact, such cutbacks are already being imposed). We desperately need to substitute serious evidence-based analysis for the rote incantation of inherited mantras which currently passes for expert economic advice in the realm of competitiveness policy in this country".

That is the conclusion reached by Proinnsias Breathnach; you can read his full post on Ireland after NAMA here.

Memo to IBEC

Michael Taft: Yesterday evening I was on Matt Cooper’s The Last Word with a representative from IBEC discussing wage levels. I quoted the numbers from the US Bureau of Labor Statistics, Eurostat and Destatis (German Statistical Board) to show that Irish labour costs are not high; indeed, they’re rather low by comparison with our EU partners.

The IBEC spokesperson insisted, however, that Irish wage levels are high – 15 percent higher than the EU-15 average. He quoted from the EU Commission’s AMECO database. I had no wish to get into an argument over this database or that; or get into a detailed deconstruction of the AMECO numbers. I just said I would put up the sources on this blog and let people decided for themselves.

Below I present the data and links. Then I look at the AMECO database. For it is the only one IBEC spokespersons use – and in doing so they are knowingly misleading the debate over our wage competitiveness.

Destatis: The German statistical board, using Eurostat data, presents the most recent numbers from 4th quarter 2008. They show, using hourly labour costs, that:

• Irish private sector wages are 1 percent below the EU-15 average (including lowly Portugal and Greece) and 14 percent below the average of our peer group – the other top 10 economies.

• Irish manufacturing wages are 2 percent below the EU-15 average and 16 percent below our peer group’s average


US Bureau of Labor Statistics: this database – based on hourly manufacturing compensation costs (including employers’ social security contributions) - is up-dated to 2007. This shows that:

• Irish manufacturing labour costs (including management salaries) are 3 percent below the EU-15 average, excluding Luxembourg and 16 percent below the average of our peer group.

• Labour costs for industrial workers (excluding management and clerical) are 3 percent below EU-15 average and 18 percent below our peer group.

These two databases are based on the actual cost of labour to employers on any hourly basis. This is the better type of measurement of costs in an economy.

OECD Benefit and Wages: this database, which measures private sector wages (NACE C – K) has a number of defects. First, it is not a measurement of labour costs but rather an attempt to identify annual wages. However, it acknowledges that some of the countries data may not include managerial and supervisorial wages, therefore under-stating some numbers. It also acknowledges that some countries data do not separate full-time and part-time wages (which we will see below can distort numbers). For Ireland, the figure is the average wage for production workers – not all private sector workers.

Especially curious are database figures for Irish wage across the years - showing inexplicable jumps:

2003: €33,939
2004: €27,781
2005: €39,206.

In 2007, the OECD shows Irish wages barely changing – up less than €300. In fact, in some previous editions of the 2007 database, average Irish production worker wages were much lower, below €33,000 – which is consistent with CSO data.

With these caveats, the database shows that average annual private sector wages in Ireland are 12 percent above the EU-15 average but 2 percent below our peer group average.

However, given the statistical inconsistency and methodological shortcomings, one should be extremely cautious about citing these numbers.

EU Commission AMECO: this database measures income but not hourly labour costs. Rather, take an ‘aggregate GDP’ approach. Essentially, they take the total amount of wages, salaries, bonuses, social security contributions and divide them by the number of workers. There are two problems with this:

First, it does not distinguish between full-time and part-time for most countries. Ireland has one of the lowest proportions of part-time workers. This can skewer the wage data (Germany, for instance has nearly twice as many part-time workers as a proportion of their workforce as Ireland). Let’s say that an employer needs 1000 hours worked with a total wage bill of €20,000. If that is divided up among 50 part-time workers, they will 20 hours a week with an average pay of €400. However, if that work is divided up among full-time workers, the average pay will be €800 per week. Whatever about the pay of different workers, there is no cost difference to the employer and no difference to wage competiveness.

Second, it does not distinguish between hours worked. Ireland has one of the highest levels of hours worked in the EU-15. If an employer needs 1000 hours worked with a total wage bill of €20,000 and divides it up among workers on a 40 hour working week, there will be 25 workers earning €800 per week. However, if that same employer divides up the working time a 35 hour working week, there will be 28.5 workers earning €700 per week. So, while there is a difference in wage, there is no difference in cost to the employer and no difference to wage competitiveness.

An aggregate approach rarely makes these distinctions. It can sometimes use a ‘full-time equivalent’ measurement – but AMECO acknowledges it cannot do this for all countries.

This is IBEC’s database of choice. As the IBEC spokesperson on the Last Word said – Irish wages would appear to be 15 percent higher than the EU-15 average. And this is what the AMECO database produces.

But does this figure measure hourly labour costs? No. Does it measure wage per hour worked? No. Does it measure the total amount of wages in the economy per total working hours? No. This database tells us what it tells us – and it tells us very little in terms of labour cost competitiveness. If the data compensated for hours worked and part-time employment, the figure would approximate the data from Destatis, Eurostat and the US Bureau of Labor Statistics.

No wonder that when our labour costs are examined with the proper measurements, other observers come to the same conclusion. The National Competitiveness Council stated:

‘Irish pay and income levels are moderate when compared to other developed high income economies . . .‘

Forfas’s report on the retail sector showed that average Irish wages are low in comparison with the Dutch retail sector.

This is more than just an argument over numbers and methodology. This is about identifying what exactly is wrong with the Irish economy and, from that, constructing policies to address the defects.

But IBEC is not interested in that. It is intentionally distorting the debate in accordance with its own agenda. Their use of wage statistics is deliberately misrepresentative.

Very simply, IBEC should stop it.

Oh, those landlords and bankers

Michael Taft: Following on from the excellent points made by Proinsias Breathnach and Slí Eile regarding the role of labour costs in economic competitiveness, it might be timely to re-examine Forfas’s comprehensive study of the cost of running retail enterprises. This is, of course, an untraded sector but such sectors are held up as being drivers in our higher living costs. If wages are found to be excessively high in comparison to other Euro zone locations, then we might, just might conclude that high labour costs are uncompetitive and feed into the economy’s general uncompetitiveness. But if not, then what is the problem?

The usefulness of the Forfas study - carried out by FGS Consulting – is the detail in which it examines the input costs: labour, rent, utilities, professional fees, transport, etc. It compares Dublin, Cork, and Limerick with Belfast, Manchester, and London. It also compares costs with Maastricht which is useful because costs comparisons are not entangled with currency depreciation. In addition, they survey these costs for department stores, convenience, stores, operations in high streets, retail parks, etc. It’s exhaustive and illuminating.

That the cost of running retail operations in Maastricht is lower than in Dublin shouldn’t surprise us. The cost for running multiples is broadly the same. However, for department stores Maastricht is up to 15 percent cheaper while in retail parks they are 4 percent cheaper. So what accounts for these cost differences? Let’s run through the different categories (the following compares Dublin with Maastricht at 2008 prices).

Labour Costs: If Maastricht operations are cheaper, it’s not because of labour. Forfas surveyed four categories of employees and found that in all categories, wages in Maastricht were higher: Sales Assistant (12.7 percent higher), Customer Sales Rep (26.6), Retail Buyer (19.7) and (9.0). So, we can discount wages as the reason for high operating costs here.

We can also discount employers PRSI contributions: here they are 10.75 percent, in the Netherlands it is 17.28 percent - 61 percent higher. Add all that together and labour costs are substantially less in Dublin (real devaluationists – take note).

Gas: gas prices are 18 percent cheaper in Dublin.

Water charges: water charges are 16 percent cheaper in Dublin.

Transport and Fuel: Inbound freight costs are 52 percent cheaper in Dublin; petrol is 23 percent cheaper while diesel is slightly cheaper at 2 percent. Indeed, labour-related transport costs are 19 percent cheaper here.

Courier Costs: It costs €8 to deliver a package within Dublin’s city centre; in Maastricht the cost is €49.

Accountancy Costs per hour: It’s 7 percent cheaper in Dublin.

So, labour costs (the largest input), payroll taxes, gas, water charges, transport and fuel (including labour-related transport costs), couriers and accountants – all cheaper here than in Maastricht. So what’s going on? Why is the cost of running retail operations more expensive here than in Maastricht?

Rent: rents are the killer. For city centre locations Dublin rents are €2,600 more expensive per square metre; for high street locations (Grafton Street compared to Grote Straat) the differential is a staggering €8,000 per square metre. Even in Outer City Shopping Centres (such as Dundrum), rents are nearly €2,700 dearer here per square metre than the Maastrich equivalent. That’s a lot money flowing out of consumers’, workers’ and owners’ pockets into commercial landlords’.

Banks: Overdrafts are more expensive here, with rates for ‘Under €1 million’ being 9 percent here compared to 6 percent in Maastricht. As the report points out:

‘In terms of the cost of finance, Ireland is the most expensive location for overdrafts and term loans. For example, an overdraft of €500,000 in Ireland would cost a business in Ireland an additional €14,800 per annum in Ireland compared with a similar facility in the Netherlands.’

So, property and banks – where have we heard that story before? There are a few other categories in which Dublin is more expensive than Maastricht.

IT service charges per hour: In Dublin, its €166 per hour; in Maastricht its €32.

Fixed Telephone Costs per minute: in Dublin, its 1 cent more for local calls, 16 cents more for international European calls, and 8 cents more for calls to the US.

Mobile Phone Costs: for local calls its 30 cents more for Dublin and 59 cents more for US calls; calls to international European destinations, however, are 20 cents cheaper in Dublin. After recent price reforms, though, these differentials may have well narrowed.

Electricity Costs per Kilowatt Hour: in Dublin, its 13.9 cents compared to Maastricht’s 11.1 cents. If, however, the Regulator would allow competition in the electricity market, costs in Dublin and Ireland would fall.

Refuse Charges: they’re 42 percent more expensive in Dublin (or €55 more per tonne). However, costs for non-hazardous and biological gate fees are cheaper in Dublin.

Legal Fees: they’re 21 percent more expensive in Dublin.

So what can we conclude? If one were to take rents and bank charges out of the equation, if would be cheaper to run a retail operation in Dublin than in Maastricht. But oh, those landlords and bankers . . .

This should make us cautious when talking about ‘high costs’ in the economy. What we badly need are more forensic examinations of the different economic sectors – of the type that Forfas has carried out with the retail sector. This would raise the debate above the level of assertion and rhetoric and allow us to put forward more effective policies based on concrete evidence, to address those areas where we do fall down.

But as the Forfas report shows – we don’t fall down on all that many areas. And certainly not on labour costs.