Stating the facts again .... and again

Michael Taft: Apologies for going over this ground again but if employers’ organisations insist on misrepresenting the issues, we have to keep correcting them. Yesterday I was on Today FM’s the Last Word with Brian Fallon from the Restaurant Association of Ireland, discussing the RAI’s latest call to cut the wages of low-paid workers. Mr. Fallon claimed that workers in the Irish hospitality sector are some of the highest paid in Europe. I pointed out that he was entirely incorrect and stated that I would put up the facts on the Progressive-Economy.ie website. So that’s what I’m doing.

The EU Commission’s data collection agency, Eurostat, publishes hourly labour costs on a sectoral basis; including the Food and Accommodation sector. For the latest year, this is what they found:

Ireland is in the bottom half of the EU-15 league table – 6 percent below the average of the other countries. This was in 2008 – the last year of rising personal income. In 2009 and 2010, Irish labour costs in this sector have fallen further behind the EU-15 average.

Caution is needed here: the EU labour cost index has a different methodology and is not seasonally adjusted. But the general trend is corroborated by other indexes – the EU Ecfin Directorate and the OECD.

If the above holds, then we should expect hourly labour costs to be approximately 9 percent below the EU-average in 2010 – falling even further behind this year and next.

By all means, lets have debates about whether increasing or cutting low wages is the best direction to take.

But let’s start that debate from verifiable facts. And the fact here is that hourly labour costs in the hospitality sector are below the EU-15 average.

I look forward to seeing Mr. Fallon’s evidence and sources to the contrary.

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.

Wages in the Crisis

Rory O'Farrell: The European Trade Union Institute has brought out a working paper on the impact of the crisis on wages in Europe (this is perhaps shameless self promotion as I wrote the paper).

It can be downloaded for free from here.

Though a lot of the data for Ireland is not available, the last section on international competitiveness is relevant to Ireland. Relative to Germany we did not lose wage competitiveness in the export driven manufacturing sector, and the role of non-wage costs to business is highlighted.

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).

A wages reality check

Do Irish workers really enjoy the fourth-highest wages in the world? It seems the headline writers didn't really read the 2009 UBS Prices and Earnings Report. Michael Taft has taken a look at the figures over on Notes on the Front.

Minimum wages and low pay

Michael Taft: The latest swing in the debate has turned on those earning the minimum wage, though in truth this is a continuation of the call last year by the Small Firms Association to cut the statutory minimum wage by €1 (or an 11.6 percent cut). We shouldn’t expect this phase of the debate to be any more illuminating than what we’ve been used to.

Take one example: comparative levels of minimum wages. It is a fact that Ireland has the second highest statutory level in the EU-15 (there are only eight other countries that have statutory minimum wages). But there’s a complementary measurement that is important to note. Using purchasing power parities helps quantify what each wage level means in a particular country (the how-much-bread-you-can-buy-with-a-€1 measurement). When we look at this, we find Ireland falling down the league tables.


We no longer have the ‘second highest’ minimum wage. We fall to fifth place, behind our economic peer group barring the UK . This is unsurprising – Ireland has higher living costs so that a Euro goes further in most other countries than here.

There are other facts. For instance, there are few workers on the minimum wage employed in the traded sectors (except for outsourced functions such as cleaning, etc.). Given the concern over cost competitiveness in this key sector, it should be noted that cutting the minimum wage will have little if any impact – and that’s even if you buy into the highly contestable argument that Irish wages are uncompetitively high.


Unfortunately, the debate over minimum wages – like the debate over the McCarthy Committee proposals – will be detached from the economic impact any proposal that such wage cuts will have. We will get some employers asserting they need wage levels cut (though not all – as one restaurant owner made clear on Live Line, opposing wage cuts as being inequitable and irrelevant to business costs). But where will be the commentators to point out the deflationary impact on the economy – reduced consumption (which will hit businesses) and reduced tax revenue.

Still, there are many who are genuinely concerned that Irish workers are raking it in – putting economic recovery in peril. We should try to comfort them. The OECD tracks the incidence of low pay (below two-thirds of median wage). Ireland ranks at the top of the EU-15 – along with that other Anglo-American economy, the UK. That should gladden the hearts of even the most robust of real devaluationists.

ICTU clarifies on employment support

Slí Eile: Following Sarah Carey's article yesterday on jobs subsidies, David Begg has provided a very important clarification in today's Irish Times
here
More details on the ICTU Job Creation and Protection Plan can be read here

The Dublin Consensus

Sli Eile: We recall the term ‘Washington Consensus’ as it was first coined in the 1980s. Dani Rodrik summed it up as:
Stablize, Privatise, Liberalise.

Part of the recipe was to get your ‘macro balances in order’
In Table 1 of his paper, Rodrik (a critic of same) lists the 10 Washington Consensus principles as:

1. Fiscal discipline
2. Reorientation of public expenditures
3. Tax reform
4. Financial liberalization
5. Unified and competitive exchange rates
6. Trade liberalization
7. Openness to DFI
8. Privatization
9. Deregulation
10. Secure Property Rights
Sounds familiar?
Rodrik outlines a supplementary list in the ‘Augmented Washington Consensus’ (sounds a bit less familiar) as follows:
11. Corporate governance
12. Anti-corruption
13. Flexible labor markets
14. WTO agreements
15. Financial codes and standards
16. “Prudent” capital-account opening
17. Non-intermediate exchange rate regimes
18. Independent central banks/inflation targeting
19. Social safety nets
20. Targeted poverty reduction

I suggest that there is, already, a real ‘Dublin Consensus’ and it goes as follows:

1. Sort out Banking through some form of toxic-containment (folks differ on the details)
2. Frontload big, immediate cuts in nominal wages in the private and especially the public sectors (real ‘plain vanilla’ cuts and not just voluntary contributions from the judiciary, contrived ‘pension’ levies and various stealth charges)
3. Frontload big, immediate cuts in public spending across the board from pay (see above) to social welfare (‘the highest in Europe’ false claim) to ‘wasteful’ capital projects to other items
4. Bring the low and middle-income groups back into the tax net
5. Downsize and reform the public sector

There are a few supplementaries like privitising some state assets – but the core of the Dublin Consensus is captured in the above five points. This is a real, audible and visible consensus from the pages of the Irish Times to learned articles and conference papers to ‘economics for the simple’ on the public airways – and of course many but not all the comments among our separated brethren on irisheconomy.ie.

By the way, I completely disagree with the view that the ‘left’ is in any way winning the economic argument.

The right is winning hands down and we are looking at, potentially, the most deflationary fiscal stance since at least the 1950s and further erosion in our already weak public and social infrastructure – relative to the standard of provision and living standards people have become accustomed to following the Celtic Tiger.

So, when journalist Sarah Carey writing in today’s Irish Times argues that the ICTU should roll over and declare:

'Comrades, I have nothing to offer you but cuts and taxes. The deeper the pain now, the quicker all this will be over’

we have to ask:

Is there no other show in town?
Has the Dublin consensus won?

Should we fold up, go home and concede that the logic of market economics, international finances, a failed domestic banking model and an overwhelming media, economics and political consensus that the only path to recovery is through cuts, more cuts, unemployment and dramatic falls in living standards. Nobody likes to say it quite like this – but that is what most people are assuming – there is no other way – we have to price ourselves back into markets, we have to balance the public books fast and hold on until the tide comes back in on an international recovery.
The debate about jobs subsidies is a deflection.

Whether or not you think such subsidies will work is not the point. My original blog questioned the evidence that they would work and implied that other uses of this expenditure would be more effective. At this point in time it is hard to cast judgment since we have no details or analysis beyond a few media leaks. And there is no certainty on where different interests stand on the various issues. The point is that we need to move away from marginal debates about relatively marginal issues to confronting the real issues:

1. Domestic fiscal stimulus versus profound fiscal deflation for 2009-2012/13
2. Skills, innovation and growing the indigenous economy on world markets versus business as usual depending on FDI and a relatively protected and cosseted non-traded sector (as in price controls, costs and rigid work practices in the case of the public and civil service)
3. Corporate governance change versus cosmetic name change
4. Finding another way of dealing with banking rather than bleeding the whole country with a blanket cheque to recapitalise the failed (with the bail-out of Anglo-Irish ultimately costing more than an entire year’s education budget)

This is where the real debate needs to be reclaimed and the Dublin Consensus challenged. Self-proclaimed progressive and left folk including public sectors unions need to get serious about reform of the public service (which is one area where the Dublin Consensus is partially right) – how can we expect people to buy-into Scandinavian tax levels and redistribution policies unless we reform, root and branch, a slowing-moving, under-funded, under-staffed (yes I meant under-staffed) and inefficient public service operating in a very inefficient manner and subject to all sorts of political constraints and centralisation that is out of line with 21st Century public management.

(Glad that progressive economy trumps Grey’s Anatomy).

"The only show in town?"

Slí Eile: In recent days, there has been a rush of reports (including EMU Public Finances 2009, IMF Report on Irish Economy, OECD Economic Outlook comments on Ireland), data, analysis and media reaction on the state of the economy, banking and public finances. One important part of the background landscape is the social partnership talks still going on, passing one deadline after another. Disclosures to the media leave one wondering what may or may not emerge. According to today’s media reports, the ICTU has 'doubts over aspects of plan for recovery’ but argues that the Government proposals were ‘the only show in town’.

Lets hope not. Can we get back to some parts of the ICTU ‘Ten-point plan’ of last February? Remember. It advocated:

1. Protecting Jobs & Tackling Unemployment (including ‘reprioritising the Public Capital Programme to support job protection and labour intensive activities’)
2. Sorting the Banking System & overhaul of corporate governance (with ‘public control, either through Recapitalisation or Nationalisation’)
3. Competitiveness (through reduction in energy prices, professional fees and other costs plus productivity-enhancing investments)
4. The Pay Agreement 2008 (ICTU has made the case that wages have not been cut in 2008 as claimed by some)
5. Fairness & Taxation (our tax system is woefully skewed and unfair with large tax breaks for the better off and widespread legal avoidance)
6. Restoring Consumer Confidence (‘Surely the most sensible option is to stimulate the economy, rather than dampen spending and growth?)
7. The Public Service ‘Pension Levy’ (‘Workers did not create the problem, but will contribute to resolving it - as long as the wealthy also contribute. The problem with the course currently being pursued by Government and employers’ organisations is that the weakest suffer, while the wealthy contribute nothing.’)
8. Pensions (use ‘a state backed annuity and the possibility that private pension funds could have the option of voluntarily surrendering their assets to the state, in return for a certain level of guaranteed pension.)
9. Employment Rights Legislation
10. National Recovery Bond (‘ It could also be targeted at specific sectors such as school building or public transport, so people could see tangible gains’)

If – according to media reports – the main carrot on the table during the current round of Partnership talks is an employment subsidy, one is forced to ask:

• Is there hard and compelling evidence from the recent past, internationally, that such subsidies work in terms of creating genuinely new jobs or saving existing ones?
• Even if the answer to the above is yes, how much would it cost on average – per job, per firm and in the aggregate? Would alternative expenditures of the same amount be more effective?

As matters stand, the latest EU figures on taxation indicate Irish taxes on labour are way out of line (very low reflecting a poor tradition of widespread social insurance). Irish employers’ contributions to social protection were 9.7% of total taxes in 2007 compared to a (weighted) EU average of 18.0%.

And we are talking about subsidies to employers?

Would it be easier to just drop payroll taxes on particular groups (say unemployed or particular types of employment and sectors). The problem with targeted interventions is not only deadweight effects, but the problem of excluding some sectors and categories and not others (like why would non-traded sectors be entirely excluded if they were producing sustainable social value?)

Karl Whelan has argued on irisheconomy.ie (with good reason I think) that:

….the principle reason for rising unemployment is a sharp reduction in labour demand owing to the steep nature of the recessions. Policies that are looking to offset this reduction in demand using wage subsidies are unlikely to have more than a marginal effect.

He goes on to argue:

one of the lessons emphasised by Jim Poterba in last week’s excellent Geary Lecture was that if we need to raise more revenue, it is best to do so by broadening the tax base while keeping rates low. Measures like this, which erode the tax base and have little effect on employment, are a step in the wrong direction.

Read his entire comment on these issues along with many comments on wage subsidie here.