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.

The battle at Boots

Michael Taft: Sometimes, something happens that takes your breath away. The chain store Boots is engaged in a deplorable assault on their employees’ wages and working conditions – employees who are some of the lowest paid in the economy. Not only that, it constitutes an assault upon other enterprises, the Exchequer and the Irish economy.

Let’s do some background. Over the summer Boots and the representatives of their employees – Mandate – met on a number of occasions to discuss a range of cost saving measures. In particular, management demanded:

• 15.5% wage reduction at the top scale of pay from €14.20 to €12 per hour
• 25% reduction in public holiday pay
• 25% reduction in Sunday Premiums
• Increased flexibility in weekend work for full time staff

Unsurprisingly, the negotiations didn’t go too well, especially given that Boots is a profitable enterprise. Mandate requested the company attend the Labour Relations Commission (LRC) to sort matters out. Suddenly, in August, Boots management wrote to the union stating that unless Mandate accepted the new pay and working conditions, Boots would terminate all existing collective agreements negotiated with the union over the past fifteen years. In addition, the management stated they would not attend the LRC. This action certainly wasn’t intended to build an atmosphere for constructive dialogue.

Eventually, management relented and attended the LRC with Mandate in October. However, such was their attitude, they might as well not. All they were prepared to do was remove the threat to the collective agreements if the union unconditionally accepted the new conditions of employment in full.

Currently, Mandate is balloting Boots employees for industrial action. The ballots will be counted on November 6th – ICTU’s National Day of Action.

It doesn’t get much worse than this. A full-time 39-hour per week employee at the top of the scale earns €28,800 – about 30 percent below the average industrial wage. Boots management is demanding a pay cut of nearly €4,500 a year. That’s savage. But Boots management isn’t just targeting those at the top of the scale – they’re demanding 25 percent cuts in holiday and Sunday pay for all employees.
This isn’t a company in trouble. In 2008, the Irish division in Boots earned €20 million in 2008 with current cash reserves in excess of €70 million. Worldwide, Alliance Boots posted an EBITDA of over £1 billion in March this year (that’s trading profit before depreciation and amortisation) while their underlying profit – excluding finance costs – is a healthy £236 million.

Okay, but what now? How has the recession and the decline in consumer spending affected Boots? Probably not much. The CSO’s Retail Sales Index shows all businesses suffering a drop of 7.5 percent in sales (from a 2005 base year). But sales in the Pharmaceuticals & Cosmetic Articles group have actually increased by 17.1 percent – the biggest increase of any retail grouping. That doesn’t’ necessarily mean that Boots turnover or profits have increased by that amount. But since it is a major player in this grouping, we shouldn’t be too surprised to see them staying relatively dry in this recessionary storm.

To be fair to Boots (which is owned by a private equity firm), they’re not just having a go at their own employees. They have recently withdrawn from the Ethical Trading Initiative, which was established 10 years ago to tackle the use of sweatshops in the developing world (members include, Tesco, Sainsbury's and Marks & Spencer to name a few). A Boots spokesperson explained their decision this way:

‘The reasoning for this is because it (the Ethical Trading Initiative) only concentrates on labour standards and at Boots we focus on all aspects of sustainability, with labour standards only one aspect of many that we need to consider.’

Yeah, sure, whatever.

The treatment of employees is bad enough – it rightly offends most people’s sense of justice and fair play. The issues, however, spill out of the workplace and into the larger economy. For instance, Boots is not just attacking its workforce – its attacking the Exchequer.

A full-time employee on the top of the scale is paying a little over €4,700 in income tax, PRSI and levies. In addition, employers’ pay a little over €2,900 in PRSI. The total benefit to the Exchequer is about €7,650.

If, however, Boots succeeds in cutting wages at the top of the scale, the benefit to the Exchequer falls by over €2,700. Even including the potential increase in corporate tax revenue (if Boots pays at the nominal 12.5 percent; it should be pointed out the real effective tax rate, when allowances and reliefs are included, is less), the net loss to the Exchequer would be over €2,100 for each Boots worker in this category. Now calculate the tax loss (and this doesn't count lost VAT revenue from reduced spending) from the full range of pay cuts that are being demanded from the 900+ employees in the chain.

The owners of Boots gets the gain; the workers – both in Boots and throughout the economy – take the pain.

And it doesn’t stop there. Staying with the full time Boots worker at the top of the pay scale, her/his disposable income would fall by nearly €40 per week. If we accept that most of this money would have been spent (those on low and average incomes have a higher propensity to spend, unlike those on higher incomes who have a higher propensity to save), then that’s money not flowing to the proverbial local shops.

Businesses reliant upon selling goods and services into the domestic economy will suffer a loss of turnover. Many of these businesses are genuinely in trouble. This decline in sales will hit them even harder with all the consequences this may hold: lower profits tax, reduced wages and/or hours, job losses: this is the deflationary process set in train by Boots. It’s not just their own workers who get slammed, it’s not just the Exchequer that gets hit – other businesses, their owners and workers, also suffer.

[Note: this is just one more example of why those economists who claim that wage cuts will automatically increase employment are wrong. The actions of Boots management is not about saving jobs, never mind creating more. It’s about enhancing profits for a private equity firm.]

That’s why the looming battle at Boots is not just a fight that only concerns those who work there. It’s our battle as well. It’s not just about ‘an injury to one is an injury to all’. This is a battle over public finances, this is a battle over economic growth, this is a battle over all our living standards.

That’s why, if the employees at Boots vote to take industrial action, they deserve our fullest support.

If you want to help create public support for the Boots workers – and hopefully force management to step back from their damaging course of action before it comes to industrial action – please spread the word.

You can circulate this e-card from Mandate to family, friends and work colleagues.
Cross-posted from Notes on the Front.

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.

So - who is taking the hit then?

Slí Eile: See post by Aedin Doris on irisheconomy 'Where are the wage cuts?' Michael Taft observes in a comment on the thread to that post:

Whatever the explanation, clearly from this, admittedly limited time span, some people are sharing the pain, some are not.

(Evidence is also emerging of increases in managers' pay in the private sector while some other groups are losing out at least at least up to Q1 of 2009). I seem to recall more than one person proclaiming wage cuts in the private sector as fact.