Who will collect our taxes?

An Saoi: Staffing in the Office of the Revenue Commissioners was already a concern when this PQ was asked on 3rd July 2008. The same question was asked on 19th January 2012 and received the following reply.

Below is a Table summarising the level of decline.

The decline is most extreme amongst male staff, particularly those involved in operational and specialist areas, with an overall 27.2% decline in male staff at the three grades.

The figures for 1st March may indeed be an overestimate. They include 28 staff over 60 and 362 staff over 55. It is questionable whether many of those people will stay.
While there are “… discussions on how to address critical skills losses that will arise due to these retirements”, it is clearly a bit late in the day: this problem was clear to many four years ago. There seems little danger of receiving an audit notification in the next few years at least.

Losses in the Revenue are disproportionate to other Government services and are being implanted at a critical time for the State when maximising tax collection is crucial. Such slashing of staff numbers raise major questions as to the ability of the Revenue to effectively police tax, customs and excise collection and doubts of the Government’s ability to reach its tax targets.

Here we go again

Michael Taft: It’s open season on public sector workers again. The Sunday Independent has a front-page shock-horror headline – €1bn pay rise bonanza for public sector. Other commentators and employers' spokespersons have been having their go's as well. But then there's Stephen Collins. Stephen has a statistic. You've been warned:

'According to the CSO, average weekly earnings in the Irish public sector are €912.84. This contrasts with average weekly earnings of €624.99 in the private sector, an astonishing gap in income.'

An astonishing gap in income? No, astonishing nonsense. Let’s go through this assertion with that most inconvenient of entities – facts.

Read the rest of this post over at Notes on the Front.

Public sector workers - some awkward facts

Peter Connell: Never let the facts get in the way of a good story. Surely a good epithet for much of what masquerades as analysis of our current crisis. And there’s no more eloquent commentator than Senator Eoghan Harris. Harris is passionate about ideas. From intellectual powerhouse of the Workers' Party to speech writer for David Trimble and public advocate for Bertie Ahern, ideas are his stock in trade.

And his latest big idea is to see high public sector wages as the obstacle to resolving our current economic crisis. Public sector pay and pensions is ‘the fattest of fat cats’. His solution, as outlined in last Sunday’s piece, is to bring public sector wages and penions back to their 2003 level. Harris dismisses Fintan O’Toole’s recently publish book Enough is Enough on the grounds that in offering solutions to the crisis the author fails to address the ‘scandal’ of high public sector pay. What we need, according to Harris are facts, or ‘awkward facts’ as he calls them. But all he offers are pronouncements and second hand, second rate analysis. Such as ‘Irish teachers are the best paid in Europe’. Of course this simply isn’t true. Harris doesn’t quote the source of his statement, he doesn’t do primary research. The awkward facts are available from the OECD (2008 data). Since 2008 teachers have had a 2.5% pay increase in October 2008 followed by pay cuts of, on average, 12-15%% (pension levy in March 2009 and pay cut in January 2010). So, if we examine the data published by the OECD, and assuming a modest 3% increase for teachers in other countries since 2008, we find that the starting salary for a primary school teacher in Ireland is below that of Luxemburg, Germany, Switzerland, Denmark, Netherlands, Spain, Norway, Scotland, England and Finland. At the top of a long incremental scale Irish national school teachers are well paid but less well paid than those in Luxemburg, Germany, Switzerland, Austria and Portugal. Exactly the same pattern is true of second level teachers. When I last checked my atlas all of these were European countries.

Harris’s ‘research’ also claims that Irish secondary school teachers ‘take the most holidays [in Europe]’. Again, let’s consult the OECD for some awkward facts regarding actual teaching hours. According to Chart D4 in Education at a Glance 2010, at lower secondary level Irish teachers spend 720 hours in class each year, above the OECD average of 703 and above that of 17 other European countries. His snide remarks about teacher’s holidays simply expose his bias.

When it comes to public sector pay Senator Harris is equally sloppy in his research. The public sector pay bill has increased significantly since 2003 but that’s more a reflection of increased public sector numbers than any pay bonanza for your average public sector worker. Let’s look at some more awkward facts. Our starting point is June 2003 when the first phase of the infamous benchmarking award was paid. Let’s say our employee is awarded a 10% increase under benchmarking. Between June 2003 and October 2008 (s)he enjoyed ten pay increases, three arising from benchmarking, three from the Sustaining Progress agreement and three from Towards 2016. The total percentage increase up to that point was 27%, when inflation over the same period was just over 20%. So, a 7% increase in real gross income. Not bad, but not a bonanza. Since October 2008 pay cuts amounting to about 13% have been imposed. Add in deflation of -5.5% and we find that the average public sector worker in 2010 has a gross salary 14% higher than in 2003 while inflation over the same period was 15%. So, in terms of gross income public sector workers are right back to where they were in 2003. Add in recently imposed income and health levies and Harris’s notion of the average public sector worker being a ‘fat cat’ is simply indefensible. He rightly feels empathy with private sector workers who have lost their jobs. He singularly fails to relate to the experience of low and middle income public sector workers who, like their private sector colleagues, are seeing their living standards assailed on all sides.

Harris claims that ‘the Government could find the €6bn it needs by simply cutting back public pay and pensions to 2003 levels’. The public sector pay and pensions bill is about €21.8 billion. To save a net €6 billion the gross bill would have to be cut by at least €8.5 billion or by almost 40%. The reason is that public servants pay PAYE, health levies, income levies, PRSI and make pension contributions to the State. Cut their pay and you cut all these sources of income to the State. Cuts don’t translate into savings. It’s a mistake repeated by most commentators. It’s simple maths. Senator Harris should try it some time.

Destroying the Public Sphere?

James Wickham: The terms of reference for the ‘Review Group on State Assets...’ are about ‘asset disposal’ in the public sector. What do we know about the sale of state assets?

1. The impact on efficiency is debatable. If state enterprises provide services of general interest they have to be regulated, and the costs of regulation can be very high. Often the requirement of competition can produce duplication and/or lack of transparent information to customers. The privatisation of public transport provides plenty of examples. It’s also worth noting that when politicians believe that only privatisation can provide efficiency, they abdicate responsibility for enforcing improvement through other means. Thus we still have no publicly responsible authority for Dublin transport, because of course eventually there’s going to be privatisation...

2. What we do know is that privatisation increases inequality. Most obviously, because it leads to lower wages for the weaker employees and higher remuneration packages for senior managers. In the worst case, managers behave somewhat like the nomenklatura of Russia, appropriating to themselves a massive share of what was public property. Less obviously, what was public property becomes private property in the form of shares, and shares are the most unequally distributed forms of personal wealth. On all this see especially Florio (2004), The Great Divestiture (Cambridge, Mass.: MIT Press).

3. In some cases, privatisation destroys the public sphere, the non-market area where citizens meet as citizens not as consumers and not as members of a particularistic group, such as a family or an ethnic group. The obvious case is public broadcasting. One of the differences between most countries of Europe and the USA is that we have public broadcasting, they have Fox. We may not appreciate the impact of this on public life, others do. Read for example the American Steven Hill’s book Europe’s Promise on how European public discussion is broader than that of the USA, partly because of public broadcasting. Even the apparently mundane service of public transport also has this sort of public element.

4. Privatisation weakens trade unions. It’s probably the major reason for the collapse of British trade union membership between 1979 and the 1990s. Again see Florio’s study for starters. So privatisation reduces the most effective countervailing power to private wealth: it probably narrows the range of public debate and undermines effective democracy.

Of course, many people want more inequality, many people want weaker trade unions, many people want to live in a more privatised and individualistic world. There are even people who believe that the wealthy should have more political power. We could have a serious democratic discussion about these values. It would be rather more honest than a discussion about ‘asset disposal’.

The State's Modus Operandi

Nat O'Connor: There are four stories in the press today that each illuminate part of a big, unanswered question, which is about what is the best way for the State to operate.

The newly elected president of the Irish Planning Institute makes a defence of planners and calls for better planning in future. Two Sandymount residents give a detailed critique of Dublin City Council's planned incinerator. An Taisce and the NRA dispute the data being used to justify the NRA's road-building programme. And NAMA seems set to decide the fate of 35 hotels.

What these stories recall is the balance that should exist between the role of the State in facilitating longer-term strategy and planning, versus the role of commercial bodies to provide more immediate goods and services (ideally within a regulatory framework that trammels market activity so that it aligns with long-term strategy).

Part of the aftermath of the economic crisis must be the widespread realisation that the over-reliance by Government and senior public servants on unregulated market forces led to a poorly planned housing system, an unsustainable hotel industry, and many other problems. Indeed, many public bodies seem to operate as if they are independent entities competing for finance and importance, rather than co-operating as partners in realising a democratically-mandated strategy.

Part of the solution must be the rise of more evidence-based policy-making and a reappraisal of the state's capacity to plan and strategize. (It is incredible that it was already the twenty-first century when, in 2004, a Taoiseach addressed a conference on the issue as if it were a great novelty!)

Yet, despite the need for strategic leadership from the State, the Government seems inevitably drawn by its 'Ireland Inc' reflex to attempt to fix our problems by relying on market-driven approaches. For example, from NAMA's business plan, we know that it will operate "as an independent commercial entity" (page 8). In relation to hotels, "Where a number of NAMA-funded hotels are competing in a location where there is only potential for a single facility, NAMA will make its decision based on the optimal commercial outcome." (page 12).

The Ireland Inc reflex is problematic. For example, NAMA will be the only market player in many situations where it owns hotels or developments of housing. Hence, there won't be a market to determine prices. And the relatively short-term decisions it makes may not reflect the long-term public interest. Hence there needs to be strategic leadership, based on solid evidence, to guide its decision-making.

The example of the incinerator critique suggests that Dublin City Council is acting like a private entity itself, by making a secret deal with Covanta that will last 25 years. The council's motivation seems to be getting a cut of the revenue stream. While I recognise the flawed funding system for local government, having individual councils make these kind of deals in order to raise money does not seem likely to be the most effective outcome for the public interest; because unlike a private company which has to pay its own way, the council is signing off on a deal that taxpayers must fund.

There needs to be a major culture shift within Government and senior public service to recognise that you simply don't run a country in the same way as a large corporation. So much of the logic underpinning the goals and purpose of the State - such as long-term planning, non-profit outcomes (like health and education), protecting the public interest and environmental sustainability - runs entirely counter to how a business operates. Yet, the row between An Taisce and the NRA, as well as the criticism of the incinerator, suggests that there is a fundamental weakness within the public service when it comes to complex analysis of data in order to guide decision-making. The NRA and An Taisce may both be making valid analyses from their different perspectives, one arguing for more roads and the other for more public transport, but where is the central strategy that describes the balance between these competing goals?
We need better quality data from the outset. Which means that public bodies need to be audited for their capacity to provide meaningful indicators relevant to the policy areas they influence. This requires a serious audit of the current data generation and data analysis capacity across the public sector - and how this can be analysed holistically by Government Departments. And, as a matter of course, all of this data should be readily available to citizens, so that secret deals become impossible!As part of public sector reform, serious attention should be paid to whether or not the universities provide enough qualifications to allow us to re-skill and up-skill senior public servants. One good example is the joint professional doctorate in Governance, jointly run by Queen's Belfast and the IPA. We need more people with MPAs not MBAs in the public service, yet nearly all the Irish universities offer MBAs but none offer MPAs.

It's time to do away with the Ireland Inc metaphor and the failed assumption that public bodies can be run along free market lines. We need a more professional approach to the role that Government must play in leading through strategic data analysis.

Having a go in the dark

Michael Taft: That the Sunday Business Post has another go at public sector workers should hardly be news. Every time they mention public sector workers, whatever the context or story, they are apt to attach the rider ‘highest paid in the Europe’. Now they are doing one better with the headline ‘highest paid in the world’. Their front page story is based on data leaked from a National Competitiveness Council report (a convenient leak as discussed over at Cedar Lounge Revolution) to be published soon but, in truth, the data they use is pretty old hat. No doubt, any attempt to deconstruct the data will be ignored – it has in the past. But let’s take up the cudgels one more time and look specifically at the health sector. For any fact-based analysis shows the newspaper headlines to be wide of the mark; indeed, it shows that they are missing a real story that should be pre-occupying us.

The story is probably close to the mark when comparing high-end professionals – the consultant doctors etc.; there is some data to show they are paid above European norms. Of course, this is part of a general story – in both the private and public sector – of phenomenally high-pay at the upper ends which distorts averages. This is why Ireland compares so badly to other EU countries in wage equality statistics. So there’s not a whole lot new there.

The story goes on to quote health statistics from the OECD Health at a Glance reports which, in the words of the OECD itself, should be ‘interpreted with caution’. And for good reason. Let’s look at hospital nurses pay in the 2009 publication. First, this does not measure hourly labour costs – which is the true determiner of cost to the employer; in the case of public sector employees, the Government. Second, it doesn’t compare like with like. For instance, data sources vary from country to country (some include private sector, some include part-time, some include non-hospital staff, some omit certain grades, etc.) – reflecting a real problem in making comparisons that can stick.

Third – and this is a problem throughout OECD wage statistics – most data is compiled on the basis of taking the total amount of wages and dividing it by the total number of employees to get, as they put it, ‘the average gross annual wage’. However, this can be highly misleading. Take this comparison from the EU Klems database (which does measure hourly labour costs).

• In Ireland, annual employee compensation (including non-wage costs) was €44,800 in the whole economy in 2007. In the Netherlands, it was €37,750. On that basis you’d say – wow, we are really high paid compared to the Dutch.

• However, when hourly labour compensation is examined we find the situation reversed. In Ireland, hourly labour costs were €24.82; in Netherlands it was €28.08. What accounts for this discrepancy?

Simple: the Dutch work less hours per employee. In 2007, each Dutch employee worked, on average, 1,344 hours per year; the Irish worked 1,805. Not only is the average working week lower in the Netherlands, there is a higher level of part-time workers.

So if you compare average annual incomes you’re likely to fall into this mistake. So when the OECD puts nurses’ average annual income in 5th place among countries surveyed (including low income Greece, Mexico and the Slovak Republic), it only tells us so much.

Where the OECD methodology is more helpful is when it compares one set of workers with another set in the same economy, since the measurement is internally consistent When this is done, it shows that Irish nurses’ making the same as the Irish average wage – which puts them 15th out of 19 in terms of intra-national comparisons. In other words, in 14 countries nurses make more in relation to the average wage in their own country. On this comparison, Irish hospital nurses are not raking it in.

So is there somewhere we can go to find a robust international comparison of labour costs in the public health sector? Unfortunately, not yet; though the OECD is trying to establish an internationally agreed base-line. However, we can turn to the EU Klemsto find a story that the Sunday Business Post might wish to investigate; though I suspect if they dug too deeply it might lead them to a politically unpalatable conclusion (unpalatable for them).

Hourly labour costs in the Irish health sector were €34.57 per hour in 2007; in the Netherlands it was €25.84. This, again, might lead us to conclude that Irish public health sector workers are, indeed, costly.

But there’s an odd trend here. In 2000, Irish labour costs in this sector were €19.74; in Netherlands it was €20.51. What explains this extra-ordinary growth and turnaround? Of course, we can always put it down to greedy public sector unions, benchmarking, milking the taxpayer, etc. However, this simplistic explanation doesn’t add up.

Given that all public sector workers were covered under the same wage agreements, the same benchmarking deals, we should – according to the greedy-public-sector-worker thesis – expect to find similar increased costs in the Public Administration sector. Except in that sector (which employs a third of all pubic sector workers), nominal hourly labour costs increased by only €6.29 per hour compared to health sector costs which increased by €14.65 per hour.

How could this be? The problem with measuring labour costs in the health sector is that 45 percent of labour is in the private sector. Unfortunately, we don’t have a breakdown between public and private health sectors. But what we may be seeing is substantially increasing labour costs arising from the costly, socially perverse and economically inefficient interpenetration of the public and private in what should be a free and public good. In other words, if public sector health workers’ labour costs have increased in the same manner as other public sector workers, the issue doesn’t lie in the public realm.

It’s hard to know; and that’s the problem. Labour costs in the Public Administration sector is lower than average Eurozone costs; ditto for the Education sector. But the health sector – which is split between public and private – significantly exceeds Eurozone averages.

We do know that of those private sector health enterprises which granted wage increases in 2009, the average increase was 15 percent; for public sector health enterprises it was 7 percent. In the heart of the recession, incomes in the private health sector were rising faster than those in the public sector (though we don’t know that nurses pay was rising this fast in the private sector).

And we do know the EU/CSO shows that between 2003 and 2008 the top 10 percent households took 73 percent of the total gross PAYE income increase in the State. Not only is Ireland suffering from wage inequality, it is getting worse – and I suspect that, public or private, not too many nurses feature in the top 10 percent.

Here is a real story – costs are increasing in public services where the private sector is playing a significant role; and income is rising faster in households which have a disproportionate number of high-end professionals. The Sunday Business Post might want to investigate this further. But I will give them this warning.

They might have to conclude that we need a truly public health sector where goods are delivered, not on the ability to pay, but on need; and we might have to do something about those high incomes.

In the meantime, for want of any analysis that goes beyond dubious headlines, repeat after me: ‘Surely, gosh, we have the highest paid public workers in the whole wide world.’

A platform for more cuts

Michael Taft: While the public sector pay agreement is presented as a platform for negotiating a reversal of the pension levy and wage cuts, the unfortunate reality is that it will likely lead to further pay cuts. Over at Notes on the Front, I investigate whether the agreement is likely to collapse under the weight of ‘unforeseen budgetary deterioration’. While this is not likely (though not impossible, things could start to get out of hand again by mid-year), such are the current trends that attempts to reverse the pay cuts under the pay review clause in 2011 will not succeed owing to budgetary slippage. In these circumstances, the pay deal will, therefore, lead to further pay cuts – potentially quite substantial ones.

Let’s assume that pay cuts are not reversed but that the agreement stays in place until 2014 – in particular, the clause:

‘There will be no further reductions in the pay rates of serving public servants for the lifetime of this Agreement.’

This clause, of course, refers to nominal pay rates – not pay rates in the real world. In the real world, what would happen to pay rates?

The Government is projecting an inflation rate of 8 percent between 2010 and 2014. Therefore, if the agreement is strictly adhered to (‘no further reductions’), public sector workers will face substantial real (i.e. after inflation) pay cuts.

Those on low pay could face up to €2,800 in real pay cuts between 2010 and 2014 (or €700 per year) while those on average pay would experience pay cuts of €3,600 (or €900 per year).

These numbers depend on the level of inflation. The Government projects it will be approximately 2 percent per year starting in 2011. The Central Bank, however, projects inflation in 2011 at 1.1 percent. The lower the inflation rate, the smaller the real pay cut. But cuts there will be.

That only tells part of the story. Some workers will face more cuts than others. Already, workers with mortgages (in particular, younger workers, many with families) are experiencing rising interest rates with more increases on the way. This will not affect older workers as much.

Nor does any of this count any extra taxation or further spending cuts. Again, in an inflationary context, some of this could take the form of freezing tax credits and tax bands. It won’t look like a tax hike, but in real terms it will be.

If pay were to say constant in real terms – using the Government’s projections – then it would have to rise by 8 percent over the next four years. If there is to be a negotiated reversal of pay cuts, this would be additional to the 8 percent. None of this is likely.

Public sector workers are not only being asked to sign up to real pay cuts, they are being asked to lock themselves into a long-term agreement. I am open to correction, but this four-year deal is one of the longest, if not the longest, agreement negotiated since 1987. That only the Government has an opt-out clause only reinforces this lock-in.

Public sector workers will face a difficult choice when it comes to voting on this agreement. However, for there to be an informed choice, all the facts should come out. And one of them is that, on current trends, acceptance of the pay agreement could lead to substantial real pay cuts.

Public sector labour costs

Over the past year and a half, a number of commentators have claimed that wages in the Irish public sector are high by international comparison. How true is this? Not very, when compared with other European countries. Over at Notes on the Front, Michael Taft examines the data and finds that,Irish public sector labour costs are below European averages. You can read his post here.

Budget 2010: public sector pay cuts in context

Paul Sweeney: As reported by the Financial Times, the Greek Prime Minster admitted on Friday December 11th that the Greek public sector has systemic corruption: “However he made it clear that Greece would not follow Ireland’s example and enforce drastic wage cuts”.

The viciousness of the attacks on the Irish public service in the run up to the Budget was such as to lead an observer to believe that it was corrupt and bloated (the adjective used with the words “public service” by certain commentators). In fact, of course, up until now the Irish public service has been relatively free of corruption and, as I show below, is scarcely bloated. The downsides of the second tranch of imposed pay cuts - in addition to deflation and a possibly delayed recovery - could potentially include, in the long term, creating some of the conditions favourable to corruption.

Regarding its 'bloated' size, the Irish public service is actually small and similar in size to that of the USA. The recent OECD report into its performance called for some improvements, but did not indicate that it was in any way bloated. There is always room for improvement in reforming public services. Similarly, there is plenty of room for reform of private sector governance – especially in banks and with regard to remuneration.

The campaign to soften up the public to accept pay cuts was remarkably successful - in the short run. The public were tuned into expecting pay cuts in the public sector.

It was argued that the public sector enjoyed massive “premia” over the private sector. The ESRI, which may have suffered some damage to its valuable reputation as an independent, learned institute, appeared to adopt a campaigning role, on behalf, it seemed, of the Government. It appeared to publish the same report over and over, asserting a huge premium. Yet, when the dust settled, a more sophisticated study by Callaghan and Foley of the CSO, read to the Statistical Society, narrowed the premium very considerably. Internationally, public sectors do pay more - in general - than the private sector (except Greece perhaps?).

Remarkably, this latter study got no publicity, whereas the reports by the ESRI got screaming headlines. If more and more people are now questioning the independence of ESRI, its important contributions, for decades, to evidence-based policy-making would be undermined. However, the institute was a victim of exaggerated reporting by certain campaigning journalists.

TINA - “there is no alternative” - was invoked to justify the cuts. We did need to make an “adjustment” of around €4bn. It was originally planned by Government that it would comprise cuts and taxes. In the end, the representatives of the very well-off won the battle. No taxes were to be raised, beyond even more taxes on consumption (carbon) which impact hardest on low-income groups.

Of course, there were many taxes which could have been raised. Among mainstream economists, only Garret Fitzgerald is making this vital point and he makes it well and regularly. Is he Ireland’s only Saltwater Economist? Are the others all Freshwater Economists?

The tax on higher earners utilising avoidance schemes could have raised €207m instead of a paltry €50m, if it was on earnings of over €100,000 (it is levied only on tax avoiders), and if it had included pension tax-avoidance schemes. A temporary levy of a mere 2% on corporate incomes would have raised €614m. A tighter tax on fugitives would have raised up to €65m in its first year, and increasing DIRT tax would get €125m, with other taxes raising much more again.

Instead of raising these taxes, this government took money off the blind. It took money off carers, and off those on the dole.

Before the Budget, it was said that if public service workers’ pay was not cut, then welfare would be cut. It was presented as either/or. Why then did public service pay get cut AND welfare also get cut?

And now the ground has been prepared. Private sector workers will have their pay cut. Overall, contrary to assertions by many campaigners, only about 15% of private sector workers have had cuts in their basic wage or salary. Many more have had reduced earnings due to less hours, cuts in bonuses and overtime. Only in the public sector have all workers had pay cuts. If the public sector workers have had pay cuts, why should private sector workers not have pay cuts too?

“When I become Minster for Finance, Ireland had the highest unit labour costs in the Eurozone”, Mr Lenihan said repeatedly on Budget day. This is untrue. Ireland has the second LOWEST unit labour costs in the Eurozone, after France (OECD). He has not corrected this yet. It is probable that he meant to say that the rise in unit labour costs in Ireland has been one of the highest (though not the highest) in recent years. All the erroneous claims around productivity and competitiveness are part of a broad campaign to get a competitive devaluation by pushing down wages.

Ireland has high consumer costs. We see this when we go abroad, and the data shows us second highest after Denmark. Cuts in wages will bring our price levels closer to the Euro average, but not in the way or with the speed the devaluationists want. The link between pay and price levels is not clear. Prices are determined externally, and much more by exchange rate movements. And why should only workers (so far - mainly public sector) take the pain. Have you asked your solicitor or GP for a cut in fees? You know what s/he will say!

The cut of €4bn is a massive deflationary cut of 2.5% GDP and 3% off GNP in 2010. If the carry-over of €3.5bn is added, the total deflationary cut is 5.6% (not 2.5% as Garret Fitzgerald said on Saturday). With these deflationary cuts, Ireland is in danger of sinking into a long decline.

League tables and losing the plot

This post was originally written on April 21st in response to an article in the Sunday Business Post. We are re-posting it following last night's Prime Time Investigates programme on social welfare fraud.
Peter Connell: As the Irish economy has spiralled downwards over the past six months, those with an interest in attempting to understand what’s happening and evaluating the solutions being proposed are, at least, being exposed to an increasing informative public discourse. You may not always agree with what economists write as opinion pieces in the national media, over at Irish Economy, here at PE or elsewhere in the blogosphere but, generally, you’re presented with reasoned, well informed arguments that represent genuine attempts to enlighten.

Instinctively when you prepare to read an opinion piece on the solutions to the country’s economic ills by Dr. Ed Walsh, ex-president of the University of Limerick (UL), you know it will be written from a particular ideological perspective. No problem there. We all have ideological perspectives, whether acknowledged or not. Dr. Walsh, since being appointed the first president of UL (then the National Institute for Higher Education) in 1970, has almost four decades of experience of public policy formation in Ireland and has held numerous influential positions in areas key to the country’s economic development including chairperson of the Irish Council for Science Technology and Innovation that advises the government on science policy. So, you could reasonably expect to find some good ideas in Dr. Walsh’s piece in the Sunday’s Business Post entitled ‘Back to when we were winners’.

According to Dr. Walsh it’s all about competitiveness. We were winners in 2000 when we were the fourth most competitive country in the world. Then we ‘lost the plot’. In 2007-8 we were back in 22nd place. And why are we down in 22nd place? The World Economic Forum said the poor quality of our infrastructure was the most problematic factor for those wanting to do business in Ireland. So, does Dr. Walsh identify some innovative ways in which we can fund investment in our infrastructure? Or perhaps he has some insights into how we might convert the significant state investment in fourth level education into innovative, hi-tech enterprises? The strange thing is he doesn’t mention the state of our infrastructure at all and, in this article at least, has nothing to say about the role that technology and innovation might play in growing jobs and creating wealth, an area in which he has considerable expertise. Instead, his piece identifies our overly generous welfare system, high wages in the public sector and failure to tax those on low incomes. Into the mix he adds rigid labour laws, the undue influence of teachers unions in curriculum development and the lack of reform in local and national governance as being the cause of our problems. That’s quite a list. And he backs his arguments up with some figures.

First of all, he suggests that we reduce the size of the public sector workforce by 85,600 to get us back to the level in 2000. Even at the crudest level we can say that, thankfully, we’ve about half a million more people in the country than we had in 2000. That’s about 70,000 more children of school-going age who require teachers in schools that have some of the highest class sizes in the OECD, and it’s up to 40,000 extra older people aged 70 and over who depend on public services more than other sections of the population. In 2000 our health service was just beginning to receive the investment it required to repair the damage done by cuts in the late 1980s. Since then an additional 9,000 nurses have been recruited, but I guess they’re surplus to requirements if we’re to ‘get back to when we were winners’. Certainly, there’s scope to reform the public sector, but not with a demolition ball.

Next up, public sector wages. Dr. Walsh argues that ‘benchmarking against other EU countries provides the framework within which Irish public sector salaries can be brought into line’. He goes on to claim that Irish teachers are paid 37% more than their British counterparts and 26% more than those in Germany. This claim appears to be a quote from Danny McCoy of IBEC writing in the Irish Independent in November 2007. The data is from 2004. But OECD data from 2005 shows something quite different (see pages 384-387). While Irish teacher’s salaries were towards the top of the table internationally, they were lower than in Germany, somewhat higher than in England, but lower than in Scotland. The OECD report also shows teacher’s salaries as a ratio of GDP per capita as a way of assessing the relative value of teacher’s salaries across countries. A secondary school teacher in Ireland with 15 years experience earns a salary equal to 1.2 times GDP per capita. This places the Irish teacher at 14th in the international league table of 30 countries reviewed by the OECD.

Next, Dr. Walsh, pleading the case of high earners, quotes the discredited statistic that the top 6.5% of earners contribute half of all income tax collected, and that 38% of the workforce paid no income tax at all. Colm Keena of the Irish Times, in an article I quoted in an earlier post, presents an alternative perspective on the data on which these statistics are based focusing on individual earners rather than revenue cases. If Dr. Walsh cares to examine the data, he will find that perhaps the most striking fact is that just 9,129 individuals earned €6.7 billion in income, while the lowest 1.2 million earners had an income of €13.3 billion between them.

And now we come to welfare fraud. According to Dr. Walsh ‘welfare fraud and welfare tourism are now a major burden on taxpayers’. And the evidence? Apparently, there are 1,044 welfare claimants at Ballyconnell Welfare Office and the town only has a population of 747 according to the 2006 census. This, he remarks, is an alarming statistic. The source of his information on the number of claimants is a Department of Social Welfare and Community Affairs press release issued by Mary Hanafin. And the implicit aim of the press release is to lay the blame for the doubling of unemployment rates in the border counties on fraudulent claimants.

Unfortunately the situation is worse than Dr. Walsh thinks. The most recent figure for March 2009 is 1,161. This information is readily available from the CSO website, which is generally a more reliable source of information than ministerial press releases. Anyone who has ever dealt with a Social Welfare Office would also know that they serve wide hinterlands, not just small towns. Preliminary research suggests that the Ballyconnell office serves a population of about 14,000. It’s one of two covering the whole of Co. Cavan. Unfortunately there are over 6,500 people now unemployed in the county, many of them young local men who worked in the construction industry.

Dr. Walsh suggests that this welfare tourism is down to our over-generous welfare payments. I suggest he reads Michael Taft’s excellent piece on this topic over at Notes From the Front. Referring to another league table, he shows that we’re in 13th position out of EU 15 when it comes to the level of unemployment benefit paid to a single claimant. Dr. Walsh chooses to compare Irish rates with wages in Lithuania and Romania.

So, unfortunately I wasted seven or eight minutes reading Dr. Walsh’s piece in Sunday’s Business Post. It’s disappointing that one of our brightest opinion formers didn’t do his homework, but presented an argument based on press releases and snippets of information chosen to bolster a particularly extreme view of where we’re at and how we can solve our problems.

In any case I’m not convinced that we should set our sights exclusively on climbing the competitiveness league table. We’re now 22nd. Above us, in 20th place, is Iceland.

Public Sector Pay - new data insights

Slí Eile: In a recent paper to the Statistical and Social Inquiry Society of Ireland, Statisticians at the CSO have presented further analysis of differences in earnings for employees in the public and private sectors (note that nobody is attempting to compare all types of income including shares, rent etc for all types of households). The paper is entitled "Investigating the Public-Private Wage Gap in Ireland using data from the National Employment Survey 2007" and may be downloaded here

The CSO paper may be viewed as a dampener on the claims by various commentators, including some economists at the ESRI, that the gap in pay 'comparing like with like' is over 20% using 2006 data. The data sources are the same (in CSO and ESRI papers) but the modelling and the exclusion of various sub-groups makes a big difference to the results - really big as the latest CSO paper shows. Readers will recall that the ESRI confidently announced a premium as if there were one way only of estimating and modelling pay in each sector. The ESRI paper entitled "Benchmarking, Social Partnership and Higher Remuneration: Wage Settling Institutions and the Public-Private Sector Wage Gap in Ireland" (Kelly et al. 2009) can be downloaded here.

They confidently concluded that:

The results indicate that the public sector pay premium increased dramatically from 9.7 to 21.6 per cent between 2003 and 2006. Furthermore, we found that by 2006 senior public service workers earned almost 8 per cent more than their private sector counterparts, while those in lower-level grades earned between 22 and 31 per cent more.


The CSO paper does not overturn the key ESRI claims. It confirms that:

* There is, indeed, a positive premium to public sector workers in all these various studies and regression specifications; and
* The premium in favour of workers in the public sector is higher at the lower end of the pay scale

Where the CSO paper differs is that:

* Different model specifications give different (and significantly different) results
* If enterprise size is included along with a focus on 25-59 yr olds permanent employee and particular occupational groups excluded you can get a very significantly reduced premium.

CSO is not convinced about the propensity score matching methodology beloved of the ESRI researchers. They state that:


'Due to the lack of systematic guidelines on the selection of a comparison group, this study does not use propensity score matching to estimate the public-private pay gap. We have found that the estimated premium using propensity score matching is highly sensitive to the criteria used to discard sub-samples without a common support.'

The bottom line in the CSO paper is as follows: 'we advise caution in attempting to estimate one definitive “answer” for the average premium'

Perhaps the most telling finding of the entire paper was the following (I have added bold):

Furthermore, in the Irish context, there are a number of occupations within the public sector that really have no comparable occupation in the private sector, and vice versa (most noticeably Gardaí, Prison Officers, and members of the Defence Forces). To highlight the consequences of ignoring this lack of comparability in some occupation sectors, this study also estimated the public-private wage gap on a sub-sample excluding personal and protective services employees.

The impact of excluding this sector was to dramatically reduce the average public-private wage gap, especially for males (from 7.2% to 2.7% using OLS). The size of this reduction was even larger when the analysis was conducted using weighted data.


Table 3 is the key table. It shows a premium of 2.7% for males when personal and protective service employees are excluded. This is hardly anywhere near John O'Hagan's presumption of a 20% cut (surely linked to the ESRI factoid). For women the premium was just over 11%. In other words to compare employees in public and private sectors a number of significant complicating factors cut across a crude comparison:

* Enterprise size (disputed by ESRI)
* Gender differences within each sector (with greater inequality in the private sector)
* Particular differences applying to groups such as Garda, prison officers.

Aside from all this various types of income are not factored in. Essentially, rental income, income on shares, dividends and other property are not included as are 'irregular bonses' - a major difference in some private sector occupations and sectors. Also worthy of note is the fact that 'irregular bonsuses' or 'benefits in kind' are not included.

In the CSO published supplementary analysis of data from the 2007 National Employment Survey (download here) P21

Earnings are 'defined as gross earnings (before the deduction of tax, PRSI, superannuation) payable by organisations to its employees. It includes normal wages, salaries and overtime, taxable allowances, regular bonuses and commissions, holiday and sick pay. It does not include irregular bonuses and commissions, employer’s PRSI, redundancy payments and back pay.'

CSO state that 'A regular bonus is defined as a bonus received every pay period although the amount may vary from period to period.'

A useful addition to the analysis is the work by John Geary of UCD and Anthony Murphy of University of Oxford. In a comment in a long thread on their research on irisheconomy.ie here
we get a glimpse of an alternative view. The main article appeared in the current issue of Industrial Relations News. (Cutting public sector pay: an alternative view - …THE JOB DESCRIPTORS USED BY CSO ARE NOT RICH AND REFINED ENOUGH…). They state that:

The risk of imposing wage cuts across the board in the public sector is that it will result in industrial strife with huge costs both in terms of the country’s economic fortunes and social cohesion. There is no single, best measure of the public sector wage premium. The estimated premium varies over time and across occupations. It also varies across the income distribution and at the upper end of the distribution, is often a discount. It is also difficult to find good “like-for-like” comparison groups for some public sector occupations. Thus, the basis on which public sector pay might be cut is not as sound as some people claim on the basis of headline figures.

It can be concluded that any generalised claims based on crude comparisons and 'one methodology-fits-all' are suspect especially when you know that a particular agenda is at stake.

Recovery is not reform

Recovery is not reform. The government’s intended path to recovery is a mixture of borrowing, pay cuts, and spending cuts. All recovery plans treat the symptoms of a downturn. Global aggregate demand has been buoyed by injections of capital by governments. There is evidence the medicine is working. Global recovery looks in sight. Reform however, is a deeper, and more important, matter.

What kind of permanent changes to the international financial system do we want to see to reduce the likelihood of prolonged downturns in the future?

You can read the rest of Stephen Kinsella's piece in today's Sunday Independent here.

Lost in the forest

Michael Taft: Some people can’t see the forest for the trees. And some people can’t see either the forest or the trees. They just can’t see. Take the reaction to the latest public sector employment earnings. The headline figures are that public sector pay has risen by 3.2 percent in the year up to June. This has resulted in even more garment-rending in some quarters – we’re in the middle of a recession, and these cocooned public sector workers are still raking it in. That’s one way of looking at it – if you can’t either see the trees or the forest. Now let’s open our eyes.

Since the payment of the last tranche of the previous agreement in September of last year (which was agreed over three years ago, what has happened with public sector pay?

First Quarter of this Year: + 0.4%
First Quarter (including the pension levy): - 7.1%
Second Quarter 2009: + 0.2%

Even without the pension levy, public sector wage growth has fallen off considerably, to a second quarter growth of 0.2 percent. This didn’t get much attention in the media. Rather, attention was focused on the annual increase which included the last tranche of the social partnership deal that was agreed over three years ago, and which was paid out last September. Throw in the pension levy, and the drop in wages was severe.

Fergal O’Brien, senior economist over at IBEC, believes he can clearly see the forest.:

‘Obviously there is clear divergence still between what is happening in the public sector in terms of controlling the pay bill versus what’s happening in the private sector.’

He bases this ‘clear distinction’ on the supposition that, while public sector pay has increased by two percent, private sector pay has fallen by 11 percent in the last year. Where does he get this figure of 11 percent? I suspect he has pulled this out of some IBEC survey of its members. Is this real? Not if official data is anything to go by.

CSO data on wages lag and, therefore, the last quarter we have data across the range of sectors reporting is the 4th quarter of last year. However, as the recession gained traction, we find that pay in almost all sectors increased well ahead of that in the public sector and utilities (which is mostly made up of public enterprises). This is a big tree to miss.

In the first quarter of this year, we can compare the broad industrial / financial sectors with the public sector. While overall pay in the manufacturing sector increased by 2.7 percent, and increased by 0.6 percent in the financial sector, public sector pay increased by 0.4 percent.

Many commentators have queried why manufacturing earnings rose during this period? We can get lost in the forest if we don’t get a grip on these numbers. As I’ve pointed out before – this earnings increase went exclusively to the managerial sector, with office and factory floor workers seeing their quarterly earnings fall. A similar trend can be seen in the financial sector.

None of this should be taken as an argument for not cutting public sector wages (or for freezing them, or for increasing them). It is, in the first instance, an argument for taking an evidence-based approach to this debate. Unsubstantiated assertions and contentions not grounded in fact have degraded the economic debate for too long; it degrades it still.

There are people who claim to know the solution to our problems, and beckon us to follow them into the forest in the hope of getting out on the other side. The problem is that too many of these people can’t see too well, and their compasses are broken. If we unquestioningly follow them, we may be stuck in the forest for a long time.

Benchmarking pay of migrants and women

Slí Eile: There is a rising crescendo of continuing controversy about public sector pay. On the one side independent statistical and research evidence is showing a ‘premium’ to public sector workers no matter what it is measured or adjusted for various measurable things. On the other side, public sector trade unions are disputing this evidence and are pointing to the difficulties of true ‘like-with-like’ comparisons.

Moreover, there is a sense that the whole controversy is removing the focus from where it should be – the super rich, the rich and the not-so-rich self-employed and owners of various sources of income other than (measurable) wage income. The work by the ESRI (and Boyle et al in 2004) has been well documented. More recently, the ESRI paper in the Economic and Social Review generated public attention (and adverse union reaction). The analysis of the 2007 National Employment Survey (same source as used by ESRI) by the Central Statistics Office has complicated the picture, somewhat, by allowing for different variables (for example size of enterprise) and different models.

In an article in the Irish Times, Scapegoating public sector lets wealthy off the hook, Fintan O’Toole makes a very good point in saying the following:

There is one sense in which the public sector unions deserve what they’re getting. Through the secretive benchmarking process, they bought in to the idea of setting wages in the public and private sectors against each other. This was always absurd and deceitful. The deception is the idea that workers in the two sectors of the economy can be compared in some cool, scientific way. In fact, we’re dealing not with science but with politics. What is the equivalent in private firms of a garda or a primary school principal? What is the equivalent in State employment of a shop assistant or a sales rep or a mushroom picker?

To say that jobs are not strictly comparable now is one thing. To have said it 5 or 10 years ago might have pointed in a different direction. One the big issues left aside by many commentators is:
The low level of pay (by international standards) among many private sector workers – in particular women and migrants. The inequitable structure of income in both private and public sectors with those at the top earning huge salaries (and in many cases non-regular bonuses not counted in the CSO National Employment Survey used by CSO and ESRI for this analysis). I am not aware of any publicity about the ‘negative premium’ to workers from EU Accession countries (-0.207 – Table C6, page 29) as well as for women (0.176 in favour of men for both sectors combined). These figures relate to permanent full-time employees aged 25-59 and using statistical controls for size of enterprise.

Where are the headlines ‘Research shows premium to Irish-national, male public-sector workers as calls emerge for reverse benchmarking to close the gap with female migrants in the private sector!’ ?

O'Toole commented:

If we’re serious about bringing public sector wages into line with those in private firms, we need to allow more exploitation of women and of the low-paid, who benefit most from having State jobs. This may be an absurd conclusion, but it is the logic of an argument that suggests that public sector workers be penalised because so many in the private sector suffer from gender discrimination, exploitation and rotten pensions.

We need to cop on to the game that’s being played here and focus on the real divide, which is not that between public and private but that between those who can really afford to live on less and those who can’t. Wages should be cut from the top down, through taxation in the private sector and pay cuts in the public sector.

Deconstructing public sector pay cuts

An Saoi and Michael Taft: There is a fundamental misconception about the fiscal impact of public expenditure cuts. It is assumed that a reduction in public expenditure of ‘x’ equals a reduction in the borrowing requirement / fiscal deficit of that same ‘x’ amount. For instance, Emmet Oliver writes in the Sunday Tribune:

‘A 5% across-the-board cut in public sector pay would yield savings of €1bn in a full year; a 10% cut would deliver €2bn.’

Our analysis tests this assumption using the example of public sector pay reduction. In doing so we have had to make some estimates (e.g. the proportion of top rate taxpayers, etc.). While these are approximations and, therefore, should be treated as ‘ballpark’ figures, variations will not result in substantially different results.

The net Public Sector wages and pensions bill for 2009 is estimated by the Department of Finance at €18.3 billion. We calculate the net savings of an across-the-board cut of 5 percent. We assume

• 60 percent of pay is taxed at the top rate
• 70 percent of employees are insurable
• 20 percent are in receipt of pensions
• No change in behaviour, (e.g. parents reducing their hours as the pay-off between additional work hours and childcare costs become less worthwhile).

5 percent of the gross Public Sector pay bill is €988 million.

Income Tax: Assuming €16 billion of the €19 billion is taxable (i.e. net of employer PRSI, pension contributions, pension levies, widow & orphans, etc), the reduction in taxable pay is €800 million. €480 million is taxable at 41% and €320 million at 20%, thus reducing the tax take by approximately €261 million.

Employer PRSI Based on the above assumption, 56% of the total payroll is insurable. Assuming that they receive pay cuts of €350 million, the Social Insurance Fund loses approximately €37 million. As the Fund is slipping into deficit, this must be made up by general taxation. There is no saving under this heading.

Employee PRSI and Health Levy: Again, making an assumption that 75 percent of the reduction in taxable pay is liable to PRSI, this would reduce the Fund by a further €24. For the Health and Income levies we assume a reduction of 4 percent – or €46 million.

Pension Contributions/Pension Levies/Widow and Orphans: Almost all Public Servants contribute to all three. The only exceptions are Civil Servants appointed before 6th April 1995, who pay the levy & W&O. Pension Levy/Pension Contributions are estimated by the Department to be €1.5 billion. A 5 percent reduction would amount to €75 million. As there is no separate pension scheme in place, Finance nets off current contributions against current pensions.

* * *

While a 5 percent reduction in the gross public sector pay/pension bill would reduce Government expenditure by €988 million, the after-tax savings would be €545 million, or 55 percent of the gross reduction.

It should be noted that the above includes a 5 percent cut in pensions. If these payments were excluded, both the gross and after-tax savings would be reduced further (pension payments make up 10.7 percent of the total pay/pension bill, or €2 billion).

However, the after-tax savings of €545 million does not represent the net savings to the Exchequer or the reduction in the borrowing requirement. For instance, with less money in the pocket there will be a reduction in VAT and Excise tax payments. This is not included in the above.

Further, it does not take into account any negative multiplier resulting in the reduction of net wages. For instance, the ESRI estimates that a reduction of €1 billion in public sector pay expenditure will result in the following:

• GNP to decline by €442 million in the first year, with a long-term effect (after six years) of a decline of €684 million

• Consumption to decline by 0.9 percent

The ESRI estimates that, on the basis of the impact to the economy, the borrowing requirement will be reduced by 0.3 percent. However, we don’t know to what extent they have factored in the above tax reductions.

Given all of the above, it is reasonable to assume that the net savings to the Exchequer / reduction in the borrowing requirement will be close to 50 percent of the gross reduction in expenditure. In other words, a 5 percent reduction in public sector pay/pensions – or approximately €1 billion – will not produce ‘savings’ of €1 billion. Rather they true savings will be close to €500 million.

If there is to be a fact-based debate over public sector pay, it is imperative that we get the numbers right.

Public Sector Pay: CSO add their part to the analysis

Slí Eile: The controversy around public-private sector pay differences continues following today's release by the Central Statistics Office of a special multi-variate analysis of pay differences based on the 2007 National Employment Survey. The full Report can be downloaded here.

The conclusion is that public sector workers are better paid than private sector workers even when statistical controls are applied in relation to age, education, experience, gender etc. However, the difference does not seem nearly as large as that shown in the recent analysis by the ESRI. The CSO are careful to point out that even when statistical controls are applied certain differences remain which are hard to account for. In other words you could have two persons employed one in the public sector and one in the private with same level of education, union membership, experience etc and yet one is better paid than the other because the context is very different. This may have something to do with the way in which pay is set at central level or with the nature of jobs in each sector. It could also indicate a degree of labour market segmentation. Another feature of both studies - ESRI and CSO - is that non-regular bonuses of employees are not included in the underlying data. This can be an important feature of some private sector occupations including finance and banking (where evidently such bonuses have been sharply cut back in recent times). Previous blogs have addressed some of the issues. See here and here. There has been, already, adverse Union reaction to the latest findings.
While it is necessary to oppose proposals to cut pay in either the public or private sectors because of their deflationary impact and the unfairness of imposing cuts in pay on average to below average workers it is not helpful to dismiss robust statistical work - limited as it is by the available data. What should be countered is the way in which some commentators jump on these findings to support their argument for levelling down of wage income to lower levels. Silence prevails on other types of income. Getting back to competitiveness becomes a matter of getting back to normal profit levels (and super-normal in the case of many sheltered sectors and quasi oligopolies).

More Talk about Public v Private Pay

The ESRI released a study today showing a gap between public and private pay. And IMPACT have released an objection to it.

But is there anything new in all this?

In many ways, the ESRI paper is academic. It is a twenty-one page report of a statistical comparison of 2003 and 2006 data, which means that it doesn't include recent changes, including further pay awards, but also pay cuts and the pension levy.

IMPACT argues that it doesn't compare 'real jobs'. Certainly, the statistical analysis doesn't seem to include trade union membership as a variable (although it does include 'membership of a professional body'). There is obviously a large different in the private sector between the 'good jobs' in large, unionised firms and the full range of private sector wages.

Are there any recent studies comparing unionised versus non-unionised levels of pay (cutting across the artificial public-private divide)? That would seem to be more pertinent. It also would refocus the question on the right to join a trade union and the right of workers to negotiate good wages. As mentioned before in relation to this issue, low wages lead to increased state expenditure, such as income supports, social housing, etc.

There probably needs to be more attention paid to the differences between managerial pay and other pay. Although there is less of a 'pay gap' at managerial level, because higher grades in the public service received higher awards in order to catch up with managerial pay in the private sector that had soared, that process failed to address the question of whether private sector managerial pay was reasonable in the first place. There probably is much more scope for re-examining managerial wages in the public sector than the broad wages of ordinary public servants - but that would involve a debate about what is a reasonable managerial wage.

The ESRI's figures, presumably from a press release, were trotted out on the radio yesterday. And the argument predictably turned to whether the public service is overpaid. But it is equally the case that workers in the private sector are underpaid, at least in some sectors. Again, it would be nice to see some international figures on this, based on purchasing power parity.

There is no doubt that the state's financial situation is dire, and some radical action will have to be taken in the immediate future. But Vincent Browne argued recently that the country's financial situation is nothing like as bad. There is still plenty of wealth in Ireland. So, it is a pity that the Government seems reluctant to grapple with the need for tax reform - and a large scale broadening of the tax base.

Further cuts in public wages will also surely depress the economy further. And then there are a lot of households who have taken out large mortgages on the basis of an ability to pay them back. Housing costs represent the stubborn bottom line in terms of the pay levels that people need to get by, and undermining people's ability to pay these loans will further weaken the banks.

All of this is to say that we are likely to see another round of arguments about public versus private pay in the media, but it is only part of the bigger picture.

A wry take on NAMA and other links

"All citizens shall extemporise pompous and reactionary views on dole scroungers, trade unions, pampered schoolchildren and other social parasites who, unlike themselves, are a “burden on the nation”. Read the rest of Fintan O'Toole's wry take on the draft NAMA legislation here. And - also in the Irish Times - Tom Geraghty of the PSEU throws some light on public sector pay. Finally, John Keane has an interesting piece in yesterday's Guardian, arguing that a failure of democracy gave rise to a failure of markets.

A more helpful starting point

Michael Taft: There are few subjects that can create dispute and contention quite like public-private pay differentials (Manus O’Riordan’s article linked on this site and the subsequent comments is a case in point). While a number of studies have attempted to provide the last word – using complex variables – the problem here is the weight given any particular input. This is not to dismiss these exercises – they are helpful. However, it only shows that even statistical analysis can be politically-laden.

I’d like to propose a new starting point in pay comparisons. It’s not the last word, but it makes a good ‘first word’ upon which further analysis can be constructed on. That comparator – or like-with-like – is enterprises of similar size. This is not only because of the obvious issue of scale (employees in larger enterprises earn more than those in smaller ones on average). There are other similarities:

• There is likely to be a more varied skill, occupational age and educational base
• There are likely be formalised pay scales
• In-house career paths are likely to be more prevalent, with more employees remaining in jobs for longer – length of employment equals higher pay
• There is likely to be a greater human-resource infrastructure
• There is higher union density with collective bargaining rights – three times more than in smaller enterprises – benefiting from the trade union premium
• A greater proportion of employees have occupational pension coverage – seven times that of small enterprises: this is where you will find most defined benefit schemes

When we use this like with like comparator, we find that public sector wages are less than in the financial sector but on a par with the industrial sector. We shouldn’t find this surprising. In the industrial sector, employees in smaller enterprises would need a 50 percent wage increase to reach the wage level pertaining in larger companies.



I have focussed on the industrial and financial sector because they’re the only sectors for which the CSO provides a breakdown by size, along with a weekly average wage. But these two sectors are useful. Combined, they comprise over 300,000 employees (the public sector employs 373,000, including public enterprise). Over 55 percent of employees in these two sectors work in the largest enterprises.

This makes no comment on the related issue of whether public sector wages should be cut. But it is important to note that the ESRI’s simulation of the economic impact of cutting public sector wages by 5 percent showed that it would result in reduced GNP and consumption while increasing, albeit marginally, unemployment. And the impact on the fiscal deficit would be negligible: reducing it by 0.4 percent (and this simulation was taken before the deflationary April budget – so the fiscal ‘benefit’ could well be even less).

I have gone into more detail on this here.

Debate on public sector pay ...

SIPTU's Manus O'Riordan - writing in the Irish Independent last week - noted that: "In the three years to December 2008, the money values of average public sector earnings increased by 11.3pc, as against 10.9pc for manual workers in industry -- essentially the same rate of increase for each, and both in turn being completely offset by the 11.0pc increase in the Consumer Price Index over the same three-year period."

Predictably, Ed Walsh - writing in yesterday's Sunday Business Post - takes a different tack: "The once-useful social partnership process transformed itself into a damaging mechanism that has fostered a bloated public sector and pay scales that bear no relationship to those of our competitors".

PE's own Sli Eile has deconstructed public sector pay figures here and here.

Any comments?