Showing posts with label wage costs. Show all posts
Showing posts with label wage costs. Show all posts
Thursday, 9 August 2012
Internal devaluation in the Eurozone
Tom McDonnell: Ronald Janssen explores the impact of falling wage costs in the Eurozone periphery here. He argues that export revival has not been enough to prevent the collapse in domestic demand that accompanies the cuts in public budgets and real wages and that the net outcome has been recessionary.
Thursday, 22 July 2010
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.’
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.’
Saturday, 30 January 2010
Memo to IBEC
Michael Taft: Yesterday evening I was on Matt Cooper’s The Last Word with a representative from IBEC discussing wage levels. I quoted the numbers from the US Bureau of Labor Statistics, Eurostat and Destatis (German Statistical Board) to show that Irish labour costs are not high; indeed, they’re rather low by comparison with our EU partners.
The IBEC spokesperson insisted, however, that Irish wage levels are high – 15 percent higher than the EU-15 average. He quoted from the EU Commission’s AMECO database. I had no wish to get into an argument over this database or that; or get into a detailed deconstruction of the AMECO numbers. I just said I would put up the sources on this blog and let people decided for themselves.
Below I present the data and links. Then I look at the AMECO database. For it is the only one IBEC spokespersons use – and in doing so they are knowingly misleading the debate over our wage competitiveness.
Destatis: The German statistical board, using Eurostat data, presents the most recent numbers from 4th quarter 2008. They show, using hourly labour costs, that:
• Irish private sector wages are 1 percent below the EU-15 average (including lowly Portugal and Greece) and 14 percent below the average of our peer group – the other top 10 economies.
• Irish manufacturing wages are 2 percent below the EU-15 average and 16 percent below our peer group’s average
US Bureau of Labor Statistics: this database – based on hourly manufacturing compensation costs (including employers’ social security contributions) - is up-dated to 2007. This shows that:
• Irish manufacturing labour costs (including management salaries) are 3 percent below the EU-15 average, excluding Luxembourg and 16 percent below the average of our peer group.
• Labour costs for industrial workers (excluding management and clerical) are 3 percent below EU-15 average and 18 percent below our peer group.
These two databases are based on the actual cost of labour to employers on any hourly basis. This is the better type of measurement of costs in an economy.
OECD Benefit and Wages: this database, which measures private sector wages (NACE C – K) has a number of defects. First, it is not a measurement of labour costs but rather an attempt to identify annual wages. However, it acknowledges that some of the countries data may not include managerial and supervisorial wages, therefore under-stating some numbers. It also acknowledges that some countries data do not separate full-time and part-time wages (which we will see below can distort numbers). For Ireland, the figure is the average wage for production workers – not all private sector workers.
Especially curious are database figures for Irish wage across the years - showing inexplicable jumps:
2003: €33,939
2004: €27,781
2005: €39,206.
In 2007, the OECD shows Irish wages barely changing – up less than €300. In fact, in some previous editions of the 2007 database, average Irish production worker wages were much lower, below €33,000 – which is consistent with CSO data.
With these caveats, the database shows that average annual private sector wages in Ireland are 12 percent above the EU-15 average but 2 percent below our peer group average.
However, given the statistical inconsistency and methodological shortcomings, one should be extremely cautious about citing these numbers.
EU Commission AMECO: this database measures income but not hourly labour costs. Rather, take an ‘aggregate GDP’ approach. Essentially, they take the total amount of wages, salaries, bonuses, social security contributions and divide them by the number of workers. There are two problems with this:
First, it does not distinguish between full-time and part-time for most countries. Ireland has one of the lowest proportions of part-time workers. This can skewer the wage data (Germany, for instance has nearly twice as many part-time workers as a proportion of their workforce as Ireland). Let’s say that an employer needs 1000 hours worked with a total wage bill of €20,000. If that is divided up among 50 part-time workers, they will 20 hours a week with an average pay of €400. However, if that work is divided up among full-time workers, the average pay will be €800 per week. Whatever about the pay of different workers, there is no cost difference to the employer and no difference to wage competiveness.
Second, it does not distinguish between hours worked. Ireland has one of the highest levels of hours worked in the EU-15. If an employer needs 1000 hours worked with a total wage bill of €20,000 and divides it up among workers on a 40 hour working week, there will be 25 workers earning €800 per week. However, if that same employer divides up the working time a 35 hour working week, there will be 28.5 workers earning €700 per week. So, while there is a difference in wage, there is no difference in cost to the employer and no difference to wage competitiveness.
An aggregate approach rarely makes these distinctions. It can sometimes use a ‘full-time equivalent’ measurement – but AMECO acknowledges it cannot do this for all countries.
This is IBEC’s database of choice. As the IBEC spokesperson on the Last Word said – Irish wages would appear to be 15 percent higher than the EU-15 average. And this is what the AMECO database produces.
But does this figure measure hourly labour costs? No. Does it measure wage per hour worked? No. Does it measure the total amount of wages in the economy per total working hours? No. This database tells us what it tells us – and it tells us very little in terms of labour cost competitiveness. If the data compensated for hours worked and part-time employment, the figure would approximate the data from Destatis, Eurostat and the US Bureau of Labor Statistics.
No wonder that when our labour costs are examined with the proper measurements, other observers come to the same conclusion. The National Competitiveness Council stated:
‘Irish pay and income levels are moderate when compared to other developed high income economies . . .‘
Forfas’s report on the retail sector showed that average Irish wages are low in comparison with the Dutch retail sector.
This is more than just an argument over numbers and methodology. This is about identifying what exactly is wrong with the Irish economy and, from that, constructing policies to address the defects.
But IBEC is not interested in that. It is intentionally distorting the debate in accordance with its own agenda. Their use of wage statistics is deliberately misrepresentative.
Very simply, IBEC should stop it.
The IBEC spokesperson insisted, however, that Irish wage levels are high – 15 percent higher than the EU-15 average. He quoted from the EU Commission’s AMECO database. I had no wish to get into an argument over this database or that; or get into a detailed deconstruction of the AMECO numbers. I just said I would put up the sources on this blog and let people decided for themselves.
Below I present the data and links. Then I look at the AMECO database. For it is the only one IBEC spokespersons use – and in doing so they are knowingly misleading the debate over our wage competitiveness.
Destatis: The German statistical board, using Eurostat data, presents the most recent numbers from 4th quarter 2008. They show, using hourly labour costs, that:
• Irish private sector wages are 1 percent below the EU-15 average (including lowly Portugal and Greece) and 14 percent below the average of our peer group – the other top 10 economies.
• Irish manufacturing wages are 2 percent below the EU-15 average and 16 percent below our peer group’s average
US Bureau of Labor Statistics: this database – based on hourly manufacturing compensation costs (including employers’ social security contributions) - is up-dated to 2007. This shows that:
• Irish manufacturing labour costs (including management salaries) are 3 percent below the EU-15 average, excluding Luxembourg and 16 percent below the average of our peer group.
• Labour costs for industrial workers (excluding management and clerical) are 3 percent below EU-15 average and 18 percent below our peer group.
These two databases are based on the actual cost of labour to employers on any hourly basis. This is the better type of measurement of costs in an economy.
OECD Benefit and Wages: this database, which measures private sector wages (NACE C – K) has a number of defects. First, it is not a measurement of labour costs but rather an attempt to identify annual wages. However, it acknowledges that some of the countries data may not include managerial and supervisorial wages, therefore under-stating some numbers. It also acknowledges that some countries data do not separate full-time and part-time wages (which we will see below can distort numbers). For Ireland, the figure is the average wage for production workers – not all private sector workers.
Especially curious are database figures for Irish wage across the years - showing inexplicable jumps:
2003: €33,939
2004: €27,781
2005: €39,206.
In 2007, the OECD shows Irish wages barely changing – up less than €300. In fact, in some previous editions of the 2007 database, average Irish production worker wages were much lower, below €33,000 – which is consistent with CSO data.
With these caveats, the database shows that average annual private sector wages in Ireland are 12 percent above the EU-15 average but 2 percent below our peer group average.
However, given the statistical inconsistency and methodological shortcomings, one should be extremely cautious about citing these numbers.
EU Commission AMECO: this database measures income but not hourly labour costs. Rather, take an ‘aggregate GDP’ approach. Essentially, they take the total amount of wages, salaries, bonuses, social security contributions and divide them by the number of workers. There are two problems with this:
First, it does not distinguish between full-time and part-time for most countries. Ireland has one of the lowest proportions of part-time workers. This can skewer the wage data (Germany, for instance has nearly twice as many part-time workers as a proportion of their workforce as Ireland). Let’s say that an employer needs 1000 hours worked with a total wage bill of €20,000. If that is divided up among 50 part-time workers, they will 20 hours a week with an average pay of €400. However, if that work is divided up among full-time workers, the average pay will be €800 per week. Whatever about the pay of different workers, there is no cost difference to the employer and no difference to wage competiveness.
Second, it does not distinguish between hours worked. Ireland has one of the highest levels of hours worked in the EU-15. If an employer needs 1000 hours worked with a total wage bill of €20,000 and divides it up among workers on a 40 hour working week, there will be 25 workers earning €800 per week. However, if that same employer divides up the working time a 35 hour working week, there will be 28.5 workers earning €700 per week. So, while there is a difference in wage, there is no difference in cost to the employer and no difference to wage competitiveness.
An aggregate approach rarely makes these distinctions. It can sometimes use a ‘full-time equivalent’ measurement – but AMECO acknowledges it cannot do this for all countries.
This is IBEC’s database of choice. As the IBEC spokesperson on the Last Word said – Irish wages would appear to be 15 percent higher than the EU-15 average. And this is what the AMECO database produces.
But does this figure measure hourly labour costs? No. Does it measure wage per hour worked? No. Does it measure the total amount of wages in the economy per total working hours? No. This database tells us what it tells us – and it tells us very little in terms of labour cost competitiveness. If the data compensated for hours worked and part-time employment, the figure would approximate the data from Destatis, Eurostat and the US Bureau of Labor Statistics.
No wonder that when our labour costs are examined with the proper measurements, other observers come to the same conclusion. The National Competitiveness Council stated:
‘Irish pay and income levels are moderate when compared to other developed high income economies . . .‘
Forfas’s report on the retail sector showed that average Irish wages are low in comparison with the Dutch retail sector.
This is more than just an argument over numbers and methodology. This is about identifying what exactly is wrong with the Irish economy and, from that, constructing policies to address the defects.
But IBEC is not interested in that. It is intentionally distorting the debate in accordance with its own agenda. Their use of wage statistics is deliberately misrepresentative.
Very simply, IBEC should stop it.
Monday, 25 January 2010
‘Ireland now needs to generate an internal devaluation, with prices and wages falling’
Slí Eile: So runs the recent ESRI Quarterly Economic Commentary (page 50).
A lot of the debate on competition and competitiveness is narrowly constrained to a view of the world that looks something like the world of ‘perfect competition’ learned for Leaving Certificate Economics: product homogeneity, perfect information, no barriers to industry entry or exit, costless transport etc. One of the features of the economy in the South of Ireland is not only its small size and trade openness but the fact that it operates with relatively diverse sub-economies.
Some recent posts and discussions on this Site have brought out the nature of these sub-economies:
* A heavily export-orientated multinational sectors specialising in certain market niches – pharma, chemicals, ICT etc, operating price transferring and profit displacement and with relatively lower labour cost input
* Some industries geared towards particular markets susceptible to currency movements (especially Sterling)
* A significant non-traded sector here wages, rents and profits are set domestically.
In discussing and measuring ‘competitiveness’ or any other macro-level phenomenon it is necessary to disaggregate somewhat. This is not to deny:
- The importance of labour costs in the total cost schedule facing enterprises
- The inter-connectedness between costs in the non-trade sector and the traded sectors
Has Ireland been losing competitiveness over the last decade? This turns out to be not so straight forward. As other posts have shown, the National Council for Competitiveness does not focus on wage cost competitiveness to anything like the extent that some commentators and media people do. The NCC Annual Competitiveness Report 2009 Volume 1: Benchmarking Ireland's Performance published last year devotes 130 pages including copious indicators and graphs to measure competitiveness (Volume 1 has the data – the recent Volume 2 published earlier this month focuses more on policy implications).
Labour costs feature in the NCC data and discourse – but very much as only one part
See page 65. There is a nice colour-coded display of green (good), orange (risky) and red (problematic) warning ‘indicators’. Unit costs in manufacturing industry is coded orange. However, on ‘non-pay’ costs the indicators are mostly red. They are:
In order for the economy to make the necessary transition from a reliance on domestic demand to sustainable export-led growth in the medium term, policies need to facilitate the convergence of Irish costs, charges, professional fees, rents and incomes/wages towards the levels of our trading partners.
Productivity and not just wage levels are important. Growth in productivity has been poor in the 2004-2008 period but there is evidence that the position has improved since 2008. For many exporting firms, labour costs account for over half of their input costs. While Irish pay and income levels are moderate when compared to other developed high income economies, wage inflation in Ireland was running at up to 50 percent higher than the Eurozone average during the 2004-2007 period. However, growth in labour costs slowed significantly in 2008 in Ireland relative to the Eurozone.
One way of calculating an overall measure of price competitiveness is to use the the Central Bank Harmonised Competitiveness Indictor (HCI). The value for HCI is determined by changes in consumer and producer prices relative to the main trading partners for this State and adjusted for change in the value of the Euro relative to other major currencies. The value of HCI (deflated for consumer prices) rose from 100 in 1999 to a peak value of 126 in mid-2008 and has fallen back to 121 in December 2009. By contrast, the value was just under 100 in December 2009 for the Eurozone countries (ECB Statistical Data Warehouse).
However, much of the increase in this Indicator from mid-2006 to mid-2008 was driven by the strong appreciation in the value of the Euro against both Sterling and the US Dollar.
See Box B in the CBI Quarterly Bulletin 2007 (2)
The US Bureau of Labor Statistics regularly publishes comparative data on pay rates. Hourly compensation rates here were, in 2007, above US values (Ireland = 117 and US = 100). However, the Eurozone average was 133. (Source: All Employees: Indexes of hourly compensation costs in U.S. dollars in manufacturing, 32 countries or areas and selected economic groups, 1996-2007)
Garret Fitzgerald’s claims that Ireland has been losing competitiveness in the last decade as signalled by loss of world market share in goods industries. However, he concedes that Services have been winning out as goods industries have been displaced. Overall, the fall in exports in 2008 was surprisingly small, here (2.75% according to the ESRI), compared to other economies in the midst of a world depression. Not grounds for complacency – but surely not indicative of a sharp deterioration in competitiveness driven by rising costs in the non-traded sector?
The picture on exports is very mixed as the ESRI has pointed out in his recent
At least a significant part of inflation in wage costs in the 1997-2007 period was driven by the property bubble – and that gives another story.
but, the ESRI give the show away on page 32 of the Winter QEC (Table 11)
[The Table shows the share of labour in GNP rising from 47.7% in 2005 to 54.5% in 2009 and then falling back to 52.5% in 2010.]
This only goes to show that some things never change:
Profits drive economic activity
Profits decline in some sectors (like banking) and can trigger crises over in the real economy
Crises lower profits
To restore profits wages must be cut
This is the key to being competitive
Cutting wages, restoring profit levels.
Lets not mince words here. We are in the middle of a calculated competitive devaluation where wage labour and people on social welfare are seeing adjustments to restore profit levels and reassure the markets and raise confidence of investors and the ubiquitous god ‘consumer’. All the talk about pricing ourselves back into world markets is a proxy for shifting the share of national income towards profits as the banking and property bubbles burst and the real economy adjusts.
A lot of the debate on competition and competitiveness is narrowly constrained to a view of the world that looks something like the world of ‘perfect competition’ learned for Leaving Certificate Economics: product homogeneity, perfect information, no barriers to industry entry or exit, costless transport etc. One of the features of the economy in the South of Ireland is not only its small size and trade openness but the fact that it operates with relatively diverse sub-economies.
Some recent posts and discussions on this Site have brought out the nature of these sub-economies:
* A heavily export-orientated multinational sectors specialising in certain market niches – pharma, chemicals, ICT etc, operating price transferring and profit displacement and with relatively lower labour cost input
* Some industries geared towards particular markets susceptible to currency movements (especially Sterling)
* A significant non-traded sector here wages, rents and profits are set domestically.
In discussing and measuring ‘competitiveness’ or any other macro-level phenomenon it is necessary to disaggregate somewhat. This is not to deny:
- The importance of labour costs in the total cost schedule facing enterprises
- The inter-connectedness between costs in the non-trade sector and the traded sectors
Has Ireland been losing competitiveness over the last decade? This turns out to be not so straight forward. As other posts have shown, the National Council for Competitiveness does not focus on wage cost competitiveness to anything like the extent that some commentators and media people do. The NCC Annual Competitiveness Report 2009 Volume 1: Benchmarking Ireland's Performance published last year devotes 130 pages including copious indicators and graphs to measure competitiveness (Volume 1 has the data – the recent Volume 2 published earlier this month focuses more on policy implications).
Labour costs feature in the NCC data and discourse – but very much as only one part
See page 65. There is a nice colour-coded display of green (good), orange (risky) and red (problematic) warning ‘indicators’. Unit costs in manufacturing industry is coded orange. However, on ‘non-pay’ costs the indicators are mostly red. They are:
- Rents of industrial sites
- Rents of office sites
- Cost of high-speed internet
- Electricity
- Waste disposal
- Accountancy fees
- IT consultancy fees
- Legal fees
- Childcare costs
- insurance
In order for the economy to make the necessary transition from a reliance on domestic demand to sustainable export-led growth in the medium term, policies need to facilitate the convergence of Irish costs, charges, professional fees, rents and incomes/wages towards the levels of our trading partners.
Productivity and not just wage levels are important. Growth in productivity has been poor in the 2004-2008 period but there is evidence that the position has improved since 2008. For many exporting firms, labour costs account for over half of their input costs. While Irish pay and income levels are moderate when compared to other developed high income economies, wage inflation in Ireland was running at up to 50 percent higher than the Eurozone average during the 2004-2007 period. However, growth in labour costs slowed significantly in 2008 in Ireland relative to the Eurozone.
One way of calculating an overall measure of price competitiveness is to use the the Central Bank Harmonised Competitiveness Indictor (HCI). The value for HCI is determined by changes in consumer and producer prices relative to the main trading partners for this State and adjusted for change in the value of the Euro relative to other major currencies. The value of HCI (deflated for consumer prices) rose from 100 in 1999 to a peak value of 126 in mid-2008 and has fallen back to 121 in December 2009. By contrast, the value was just under 100 in December 2009 for the Eurozone countries (ECB Statistical Data Warehouse).
However, much of the increase in this Indicator from mid-2006 to mid-2008 was driven by the strong appreciation in the value of the Euro against both Sterling and the US Dollar.
See Box B in the CBI Quarterly Bulletin 2007 (2)
The US Bureau of Labor Statistics regularly publishes comparative data on pay rates. Hourly compensation rates here were, in 2007, above US values (Ireland = 117 and US = 100). However, the Eurozone average was 133. (Source: All Employees: Indexes of hourly compensation costs in U.S. dollars in manufacturing, 32 countries or areas and selected economic groups, 1996-2007)
Garret Fitzgerald’s claims that Ireland has been losing competitiveness in the last decade as signalled by loss of world market share in goods industries. However, he concedes that Services have been winning out as goods industries have been displaced. Overall, the fall in exports in 2008 was surprisingly small, here (2.75% according to the ESRI), compared to other economies in the midst of a world depression. Not grounds for complacency – but surely not indicative of a sharp deterioration in competitiveness driven by rising costs in the non-traded sector?
The picture on exports is very mixed as the ESRI has pointed out in his recent
Quarterly:Exports of chemicals and related products increased by 12 per cent, driven by strong growth in pharmaceutical products and organic chemicals. Across the other broad categories, there were significant declines in the exports of electrical machinery and computer equipment; the latter is likely in part to reflect the relocation of Dell to Poland. Furthermore, there has been a fall in exports to the UK of over 16 per cent over the same period, this is most likely driven by the recent weakness in Sterling together with the weak performance of the UK economy.
At least a significant part of inflation in wage costs in the 1997-2007 period was driven by the property bubble – and that gives another story.
but, the ESRI give the show away on page 32 of the Winter QEC (Table 11)
Finally, the last line in the table can be viewed as an indicator of competitiveness. While it is not the case that there is some target level for labour’s share of output, the increase in the value of the variable into 2009 points to declining competitiveness. If our forecasts are correct, and in particular if wages fall by 2½ per cent in 2010, there will be a significant improvement in competitiveness and this is reflected in the fall in labour’s share in 2010 relative to 2009.
[The Table shows the share of labour in GNP rising from 47.7% in 2005 to 54.5% in 2009 and then falling back to 52.5% in 2010.]
This only goes to show that some things never change:
Profits drive economic activity
Profits decline in some sectors (like banking) and can trigger crises over in the real economy
Crises lower profits
To restore profits wages must be cut
This is the key to being competitive
Cutting wages, restoring profit levels.
Lets not mince words here. We are in the middle of a calculated competitive devaluation where wage labour and people on social welfare are seeing adjustments to restore profit levels and reassure the markets and raise confidence of investors and the ubiquitous god ‘consumer’. All the talk about pricing ourselves back into world markets is a proxy for shifting the share of national income towards profits as the banking and property bubbles burst and the real economy adjusts.
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