Cork incomes seminar

Videos of yesterday's seminar on 'Incomes - Instruments of Recovery', held in Cork, will be available shortly. Meanwhile, click here to see some of the presentations.

Party nation

Michael Taft: Remember that statement – how during the boom years we all ‘partied’ as a nation? Remember those prescriptions – how we had to cut back our living standards, probably back to 2003; in order to restore competitiveness? Remember how we were told that we were living beyond our means and now we had to purge (and purge and purge). With an important seminar on incomes and recovery being hosted by TASC in Cork on Thursday, let’s see just how much we partied, how we lived beyond our means, and how much – as a nation – we indulged at the table of plenty. You can read the rest of this post here.

On premature optimism

Terrence McDonough: On Thursday, some positive Irish growth figures provided an island of optimism in a sea of bad international economic news. Any such optimism is grossly premature. It is certainly true that the transnational sector of the Irish economy has been performing well for some time. Indeed this has been true for much of the downturn. Business-friendly spokespersons have failed to observe that this continuing success is an indication that there is no need for the obsessive pursuit of “competitiveness,” often used as a code word for declining wage rates and deteriorating working conditions for the ordinary employee.

The current market turmoil is intimately related to the fact that the prospect of a second dip in the ongoing economic crisis has not concentrated the minds of American and European policy makers. Instead it has promoted policy chaos and political infighting. The upshot on both sides of the Atlantic is the promise of more austerity. This can only serve to shrink Irish export markets. The IBEC optimism that Ireland can carve out a larger share of a shrinking pie amounts to nothing more than whistling in the dark.

What is the Irish government’s response to this situation? It can be easily summed up as a three point programme. Point number one is to sustain the health of the private banking system through the injection of public money. Point number two is the elimination of the budget deficit, primarily through cuts and secondarily through regressive tax increases on the ordinary Irish citizen. Point number three is to restore competitiveness through driving down wages. It is contended a low cost economy with a low spending, responsible government and a newly healthy banking system will set the stage for a recovery in investment, growth and employment. The problem is this programme will not work and will only succeed in making the crisis worse.

With apologies to Steven Spielberg, saving private banking has proved to be a mission impossible. Indeed, it has been the most manifest and abject failure. The previous government’s first response was the disastrous bank guarantee. This was followed by NAMA, designed to relieve the banks of toxic assets, replacing them with government bonds. The cleaned up banks were then to get lending again. The storm of protest which broke over this plan failed to stop it, but forced the government to acquire the assets at a much more substantial discount than originally planned. This only made sure the government would be forced to recapitalize the banks.

The forced recapitalization has not produced the desired results. Lending both to Irish households and non-financial businesses has not recovered and in fact has continued to decline. An Irish Central Statistics Office (CSO) study compared access to finance in 2007 and 2010. It found some decline in loan applications but identified a much bigger decline in loan approval rates which were 95% in 2007 but only 55% in 2010. Significantly, 61% of businesses believed that banks were less willing to provide finance. The Irish Small and Medium Enterprises Association (ISME) latest quarterly survey found that along with an increase in requests for credit, the rate of refusals was 54%. The deleveraging programme under the EU/IMF bailout programme requires the banks to shrink their assets by 72 billion euros by 2013. As loans are one class of assets, this hardly encourages new lending.

While it is unclear whether the government’s strategy has resulted in increased bank lending, there is no question that these actions have resulted in a substantial increase in the level of Irish government debt. In the establishment view this only lends urgency to the deficit cutting effort of programme point two. In addition to bailing out the banks, the government has been busy holing the public lifeboat.

Expenditure will be cut and taxes will be raised. The major unanswered question, however, is whether these actions will succeed in reducing the deficit. The belief that expenditure cutting reduces deficits is based on a false analogy with the family budget. If you cut spending and increase revenues your deficit would fall. It is not necessarily the same with the government’s budget. Spending cuts (and to a lesser extent tax increases) tend to damage demand in the economy, stifle growth, and lead to lower levels of economic activity and employment. This impairs government tax revenues and consequently may fail to reduce the deficit. It could conceivably actually lead to higher deficits. As unemployment rises, increased social benefit spending tends to counter cuts in other areas. Prof. Victoria Chick and Ann Pettifor have recently evaluated a century of UK data concerning the possibility of improving government finances by cutting expenditure. They find that “when expenditure rises comparatively rapidly, the debt ratio falls and the economy prospers, and when it levels off, the debt ratio worsens and macroeconomic indicators are less favourable.” Contrary to much conventional wisdom, “fiscal consolidations have not improved the public finances.”

The government’s third point involves deep-sixing wages. The previous government’s attack on the poor through the reduction in the minimum wage was beaten back. Perhaps recognizing the old government’s mistake was in mounting an across the board assault, the new government has singled out those covered by the Joint Labour Committees. Unfortunately, there are sound economic reasons why wage cutting in the Irish economy is far from a good thing.

First, falling wages directly damage demand, cutting sales and creating further unemployment. An environment of wage cutting creates insecurity and reduced spending.

A second factor is that falling wages will compound the problem of our high levels of indebtedness. Falling incomes means that debt payments will take an ever larger percentage of income.

Thirdly, stable wage rates provide an anchor in the economy. All other prices are tied to them. Falling wages can cause falling prices which can trigger further falls in wages and prices. This is called deflation by economists. What’s wrong with falling prices? Would you buy a product now if you expected it to be cheaper in the future? Would you pay today’s prices to invest now if you could only eventually sell your product at tomorrow’s lower prices? Deflation has the potential to seize up an economy. Finally, falling wages will not recreate the Celtic Tiger. It is true that lower Irish wages initially contributed to attracting foreign investment. But it is not possible to wind the clock back to 1987. Much has changed. There are even lower wages available elsewhere and, with the enlargement of the EU, available not so far away.

While these three programmatic points are the essence of the austerity programme imposed by the EU/IMF, the elite consensus is that “these are things we would have to do anyway.” Indeed, the current government strategy is identical to the last government’s strategy. Thus the current policy represents a political consensus involving all the main political parties, Fine Gael, Labour and Fianna Fail. This political consensus is indicative of similarly wide-spread agreement among business, media, and academic elites.

Ireland has been seeking a neoliberal path out of a neoliberal crisis. That it has been joined in this effort by most of the Western economies makes it no less nonsensical and even less likely to succeed. Eventually, truly innovative and difficult measures will have to be taken. Debt forgiveness, monetary independence, publicly-owned banks and government job guarantees need to be put on the agenda. Irish elites have been echoing Margaret Thatcher in contending that there is no alternative. International investors have an alternative. They are moving their money into US bonds, Swiss Francs and gold. They are not political radicals, but they are sending governments a message. It would be wise of both governments and academic pundits to stop trying to ignore it.

The four factors shifting power away from workers and citizens

Paul Sweeney: In developed countries, there has been a decline in labour’s share of national income going to wages for many years. This has major implications not just equity, but for demand, for growth itself. In Ireland, labour’s share fell from a high 70% in 1987, to only 52% in 2002, but unusually, has risen since. However, at 63% in 2011, it is still below that of Germany (68.3 %), UK (71.3%) or even the US (64.3%).

The labour market is also becoming polarized between “cool jobs and crap jobs”. At the top, owners and top executives are paying themselves obscene and utterly undeserved sums, as shareholders are unable to govern them. They have rewritten the rules of corporate governance in their favour – and that what makes government policy on taxation and on corporate governance so important.

There has also been a steady rise in the number of top jobs and in jobs at the bottom, with the proportion of jobs in the middle declining.

At the bottom, the shift in manufacturing from the west has eliminated some of the best jobs for unskilled or semi-skilled workers. It has also hit trade unions. In the middle, even with university education, jobs are becoming increasingly precarious – more short-term contracts, poor or no pensions, poorer public services – ironically as the squeezed middle is unwilling to pay for them and corporations do not.

I believe that the future will bring greater insecurity with stagnating incomes, increasingly precarious employment and uncertainty - unless there is a radical re-think of key issues like taxation and the governance of companies worldwide.

There are four factors which have assisted the change in the balance of power away from workers and citizens. It is not just the immense burden of debt which governments and bankers have hung around our necks, which is driving this shift.

Firstly, globalisation has exacerbated major trends in labour markets and in income distribution.

Secondly, there has been a decline in trade union density. This is a key to the decline in the relative share of labour income. Whether one like unions or not, this decline in density and unions as a countervailing power to corporations means demand is ebbing in all developed economies as people become less well-off and more insecure over time. The shift of national income has been to the very wealthiest, who do not spend their money (they have too much). Nor do they invest so readily – aggregate demand is down and so investment is becoming less profitable.

The third factor is that capitalists have become more aggressive in undermining the Social Contract with labour and with society in general.

Indeed, most do not realise the Crash of 2008 may have been only the first step in their own decline.

So far these trends have by-passed many emerging economies – but not for long, since most tend to ape the worst excesses of the West.

The fourth factor is the decline in progressive taxation. For example, corporation tax rates are declining in most countries, led by Ireland, as they compete for foreign direct investment. Fifteen OECD countries had wealth taxes in 1995, only three have today. Taxes on inheritances have been scaled back too. Lower tax rates are not a problem if they are accompanied by cuts to tax avoidance schemes, but governments have failed to eliminate most of these – leaving both lower rates and avoidance mechanisms in place for the rich and corporates.

Radical reform of taxation is one key driver in reform and changing the balance of power, and that will be the subject of my next post.

Thomas Palley on a global minimum wage system

Thomas Palley is Bernard L. Schwartz Economic Growth Fellow with the New America Foundation. This piece was originally published in the FT Economists' Forum. The proposal is drawn from his forthcoming book, From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economic Ideas, Cambridge: Cambridge University Press.
The global economy is suffering from severe shortage of demand. In developed economies that shortfall is explicit in high unemployment rates and large output gaps. In emerging market economies it is implicit in their reliance on export-led growth. In part this shortfall reflects the lingering disruptive effects of the financial crisis and Great Recession, but it also reflects globalization’s undermining of the income generation process. One mechanism that can help rebuild this process is a global minimum wage system. That does not mean imposing U.S. or European minimum wages in developing countries. It does mean establishing a global set of rules for setting country minimum wages.

The minimum wage is a vital policy tool that provides a floor to wages. This floor reduces downward pressure on wages, and it also creates a rebound ripple effect that raises all wages in the bottom two deciles of the wage spectrum. Furthermore, it compresses wages at the bottom of the wage spectrum, thereby helping reduce inequality. Most importantly, an appropriately designed minimum wage can help connect wages and productivity growth, which is critical for building a sustainable demand generation process.

Traditionally, minimum wage systems have operated by setting a fixed wage that is periodically adjusted to take account of inflation and other changing circumstances. Such an approach is fundamentally flawed and inappropriate for the global economy. It is flawed because the minimum wage is always playing catch-up, and it is inappropriate because the system is difficult to generalize across countries.

Instead, countries should set a minimum wage that is a fixed percent (say fifty percent) of their median wage - which is the wage at which half of workers are paid more and half are paid less. This design has several advantages. First, the minimum wage will automatically rise with the median wage, creating a true floor that moves with the economy. If the median wage rises with productivity growth, the minimum wage will also rise with productivity growth.

Second, since the minimum wage is set by reference to the local median wage, it is set by reference to local economic conditions and reflects what a country can bear. Moreover, since all countries are bound by the same rule, all are treated equally.

Third, if countries want a higher minimum wage they are free to set one. The global minimum wage system would only set a floor: it would not set a ceiling.

Fourth, countries would also be free to set regional minimum wages within each country. Thus, a country like Germany that has higher unemployment in the former East Germany and lower unemployment in the former West Germany could set two minimum wages: one for former East Germany, and one for former West Germany. The only requirement would be that the regional minimum wage be greater than or equal to fifty percent of the regional median wage. Such a system of regional minimum wages would introduce additional flexibility that recognizes wages and living costs vary within countries as well as across countries. This enables the minimum wage system to avoid the danger of over-pricing labor, while still retaining the demand side benefits a minimum wage confers by improving income distribution and helping tie wages to productivity growth.

Finally, a global minimum wage system would also confer significant political benefits by cementing understanding of the need for global labor market rules and showing they are feasible. Just as globalization demands global trade rules for goods and services and global financial rules for financial markets, so too labor markets need global rules.

In sum, globalization has increased international labor competition, which has contributed to rupturing the link between wages and productivity growth. That rupture has undermined the old wage based system of demand growth, forcing a turn to reliance on debt and asset price inflation to drive growth. It has also increased income inequality. Restoring the wage – productivity growth link is therefore vital for both economic and political stability. A global minimum wage system can help accomplish this.

Lessons from Brazil

Paul Sweeney: While the recession shows no sign of ending here, it is good to look abroad at other counties which had hard times and are doing well today. Brazil's GDP grew 7.5 percent in 2010 and is expected to grow approximately 4 percent in 2011. Brazilians are benefiting from stable economic growth, low but rising inflation and improvements in social well-being.

When Brazil elected the Workers Party leader Luiz Inácio Lula da Silva as President in 2003, many western commentators predicted that with left politics and even worse, equalitarian economics, the country would soon collapse again. A founding member of the Workers Party (PT – Partido dos Trabalhadores), Lula had run for President three times unsuccessfully, before the was finally elected in 2003.

In the late 1970s, when Brazil was under military rule, Lula helped organize union activities, including major strikes. The strikes were deemed to be illegal, and Lula was jailed for a month. He was a trade union activist and in 1975, he was elected president of the Steel Workers' Union, in the region where the major car makers’ plants are. In 1980, he and a group of academics, intellectuals and union leaders founded the Workers' Party, a progressive left party to struggle against Brazil's military government.

Less than 30 years later, in 2009, Newsweek called Lula “the Most Popular Politician on Earth” as he addressed the UN in New York. “With his leadership, Brazil has withstood the global crisis better than almost any other nation: not a single bank went under, inflation is low, and the economy is growing again. "People doubted it when I said we would be the last to fall into recession and the first out," Lula told Newsweek in an exclusive interview. “Brazil is looking pretty good compared with most places; it's outpacing Russia and joining India and China — the other big emerging powers tagged collectively BRICs — to lead the way back to global economic growth” Newsweek concluded

Even the right wing Economist magazine more recently confessed, in its 4th June edition “A decade of faster growth and progressive social policies has brought a prosperity that is ever more widely shared. The unemployment rate for April, at 6.4%, is the lowest on record. Credit is booming, particularly to the swelling numbers who have moved out of poverty and into the middle class. Income inequality, though still high, has fallen sharply. For most Brazilians life has never been so good.”

Lula’s successor is President Dilma Rousseff who took office on 1st January. Ms. Rousseff, the first woman President, has vowed to eradicate extreme poverty and keep the country on a sustainable development path. However, the economy does appear to be overheating. This is an important and difficult challenge for all politicians, because when Ireland economy was overheating in the 2000s, those of us who said taxes should be raised were ignored or at best ridiculed. In short, most politicians do not want to deal with pro-cyclical trends.

The tight labour market may push up prices and workers will seek higher wages as inflation takes off. Brazil’s minimum wage will rise by 7.5% in real terms next year, which is in stark contrast to the decision to cut our minimum wage by the Green / Fianna Fail parties, which has happily been reversed by this government. With the boom, foreign investors have poured in and the currency is overvalued, causing industrial production to dip a little.

The population is over 186 million and its fertility rate is below replacement, with an employment rate of 68%. Its GDP per head is €10,427 on a PPP basis in 2009. It is largely Roman Catholic (74%), and life expectancy is 69.4 years (men), 77 years (women). Brazil was one of the last to fall into recession in 2008 and among the first to resume growth in 2009.

Ms. Rousseff depends on a wide and fractious coalition. Her main partner is the populist Brazilian Democratic Movement which is squabbling on issues. The Government is tightening the booming economy with the rate of interest raised a little – three times this year to 12%. Booming tax revenue has improved the primary surplus, but the government has tightened up spending though, mainly on the capital side.

The Growth Acceleration Plan (PAC, in its acronym in Portuguese) launched in 2007 to increase investment in infrastructure and provide tax incentives for faster and more robust economic growth. It has worked and contributed to the country’s 5.1 percent growth in 2008 and its quick recovery from the crisis in 2009, when it had one of the smallest downturns among developed and emerging economies.

There are important infrastructure challenges. The country will host the World Cup in 2014 and the Olympic Games in 2016, demanding massive investments in areas such as urban and social development and transport infrastructure.

Brazil experiences extreme regional differences, especially in social indicators such as health, infant mortality and nutrition. The richer South and Southeast regions enjoy much better standards than the poorer North and Northeast.
Poverty (PPP US$2 per day) has fallen greatly, from 20 percent of the population in 2004 to 7 percent in 2009. Extreme poverty (PPP US$1.25 per day) has also dropped dramatically, from 10 percent in 2004 to 4 percent in 2009.

Between 2001 and 2009, the income growth rate of the poorest ten percent of the population was 7 percent per year, while that of the richest ten percent was 1.7 percent. This disparity on income rise helped decrease income inequality (measured by the Gini index) from 0.596 to 0.54 in the period. Key drivers of this have been low inflation, consistent economic growth, well-focused social programs, and a policy of real increases for the minimum wage. However, despite these achievements, inequality remains at relatively high levels for a middle income country.
Yet overall progress has been good. Who says you cannot have economic growth through egalitarian economics?

Why are businesses going out of business?

Michael Taft: To listen to employers’ groups and Minister Bruton, you’d think that businesses are going out of business because the lowest paid workers in the economy are too highly paid. This argument has to ignore the EU Commission’s data showing that labour costs in the Irish hospitality and wholesale/retail sector are below the EU-15 average. This also ignores the fact that labour costs in these two sectors have already fallen by between 4 and 5 percent; if cutting labour costs will result in job retention and business survival why hasn’t it already?

So, if it’s not labour costs or high wages in the low-paid sectors, what is the problem? The answer is rather straight-forward: fewer customers spending less money.

We fail to appreciate the scale of the economic collapse in Ireland in comparison with other Eurozone countries: GDP, investment, etc. In particular, we fail to appreciate the collapse in consumer spending. In the three year period of our recession 2007-2010, Irish consumer spending has fallen in real terms by -10.2 percent. In the Eurozone, consumer spending has actually increased marginally by 0.1 percent.

In 2010, we spent €12 billion less than in 2007 – a fall in nominal terms of -13 percent. That is one heck of a hit for business reliant upon domestic demand to absorb – and many of them couldn’t.

The collapse in Irish consumer spending in unprecedented among the original Eurozone countries; there is nothing to compare to our experience – though Greece, a latecomer to the recession, looks set to see consumer spending fall by -13 percent in real terms up to 2011

The next couple of years aren’t going to provide much relief for domestic businesses. Up to 2012, the EU projects Irish consumer spending to fall a further -3 percent. The Eurozone, on the other hand, is expected to grow by 2 percent. Europe goes forward; Ireland lags further behind.

The demands for more pay cuts and Minister Bruton’s proposals are likely to exacerbate this situation. With more taxes coming down the line (the household/utilities charge) combined with rising interest rates and inflation are going to squeeze consumer spending even further. And then there is the precautionary saving arising out of concerns over pension funds, children’s education costs, nursing home costs and rising health insurance premium – a lot of social uncertainty compounding economic uncertainty.

Put simply, businesses are going out of business because there are fewer customers spending less money – whether that’s due to unemployment, emigration, falling disposable income (through tax increases), savings due to fear, etc. If you don’t fix that problem, that problem will persist.

But let’s not be seduced by the argument that if only we could ‘create’ certainty, then all those household savings could be unleashed into the market and growth would be restored. Consumer spending falls are as much a result of the economic collapse as a cause.

Sustainable recovery will occur when we drive up investment (whose collapse puts the fall in consumer spending in the shade). This will drive employment and productivity. More importantly, this will drive sustainable wage-led consumption, rather than credit-led consumption.

We need a different mind-set to the crisis than the one we’re being treated to. In short, when you deflate the economy and wages, you will crash consumption which will feed into further collapse.

In this context, if you believe cutting wages is a means to increase employment is not an exercise in economics. It is an exercise in alchemy.

Wage-setting mechanisms: statement by 36 economists, analysts and social scientists

“We broadly welcome the Report of the Independent Review of Employment Regulation Orders and Registered Employment Agreement Wage-Setting Mechanisms. In particular, the recommendation that the basic JLC framework should be retained is good news for many thousands of low-paid workers. We also endorse the conclusion reached by Kevin Duffy and Frank Walsh that reducing JLC rates to the minimum wage level would have important distributional consequences without having any substantial effect on employment.

“We are concerned that recent proposals reportedly made by Enterprise Minister Richard Bruton are not in line with the Duffy-Walsh report [...]"

Click here to read the rest of the statement issued today by 36 economists, economic analysts and social scientists, all members of the TASC Economists' Network.

Economics or politics? The longer game

Tom McDonnell: The reported decision to go well beyond the recommendations of the Duffy-Walsh report, coupled with the tax cutting emphasis of the recent 'jobs initiative', provide clear signals of the Government's vision for restructuring the economy.

As the Independent Duffy-Walsh report makes clear, the employment effects of cutting the wages of low-income groups are not significant. What this implies is that the impact on the public finances will be negative overall (as well as the direct taxation effects, there will also be increased Family Income Supplement payments and reduced VAT receipts). The real effect will be that the exchequer will be subsidising employers.

So why might a Government target low-paid workers? Although the economics of the move are shaky, it does make sense politically. Any Government facing into years of unpopular measures which are sure to alienate and anger various groups requires a 'narrative' to justify its actions. If such a Government can point to its 'resolve' on this issue and to its success in reducing wages, then it becomes very difficult for other groups to credibly argue about the 'inequity' of a measure or the hardship caused by future taxes or pay cuts.

If the Government is coming under pressure to shy away from a particular tax increase or spending cut it can simply play its new 'we're all in this together' card. It will point to the wage reductions it has engineered in the low-pay sectors and then tell the specific group hit that everyone has to 'contribute'.

Thus, while the economics may not make sense, in political terms the policy of going after low paid workers in the short-term can be seen as a strategy for softening the resistance to particularly controversial austerity measures in the medium-term.

The madness of the drive to lower wages

Michael Burke: IBEC’s attack on the JLC wage setting mechanisms in order to drive pay lower is not simply morally indefensible. It is economically illiterate.

The attack on the JLC is simply the latest round in the battle to lower real disposable wages which has already seen pay cuts and ‘levies’ in the public sector, as well as increases in indirect taxes, which, because they are based on consumption, adversely hurt and disproportionately hurt the poor.

In any normally-functioning market economy the financial functions of the three main sectors are as follows:

*Households save some proportion of their net incomes

*Corporations borrow that savings for the purposes of investment (mainly via the mediation of the banks)

*Governments can run either a deficit or surplus, depending on the fiscal policy mix

(For the sake of clarity we’ll leave aside the role of borrowing from/lending to the rest of the world)

However, as the chart below shows, this economy has not been a normally-functioning one for some time.

Source: CSO

*Over a prolonged period (2002-2008) the household sector has been a net borrower

* For the entire period the corporate sector has not been a borrower but has been a net saver, and has significantly increased its savings in the economic slump

* Therefore, the government is obliged to become a net borrower, since all sectors cannot simultaneously be net savers.

At the sectoral level the source of the deficit is simply this fact- now that both the household sector and corporate sectors are net savers government is obliged to become a net borrower.

How to correct this imbalance? Policy has been to reduce the government borrowing by seizing a greater proportion of the household sector’s income (via taxes, pay cuts and reducing the government ‘s own investment).

But it has failed for two reasons. The household sector becomes more fearful (not more confident, as some of the wilder supporters of this policy have claimed) and so becomes even more inclined to save, not spend. At the same, the corporate sector seeing its two main customers (households and government) reining in their own spending has no need to increase its investment and instead increases its savings. The economy goes into a tail-spin and the government borrowing remains stubbornly high.

Alternative

What is the alternative? The household sector is supposed to be a net saver in a normally-functioning market economy. Now it is- even if the brutal manner in which that has been achieved has been highly damaging. But the corporate sector remains a large net lender, when it should be a borrower for investment. The slump in investment arithmetically accounts for the entire slump in the GDP of this economy. It is the corporate refusal to invest which both accounts for the slump and will prove hugely damaging to the economy over the long run- if it is not corrected.

At the same time, the existence of this corporate net lending belies entirely the notion that the economy is “broke”. The household sector may feel like it is broke. The government may be in danger of becoming broke, primarily because it insists on handing over money it doesn’t have to one part of the corporate sector; finance. But in 2009 the net income of the corporate sector was €38.8bn.

This is much reduced by the slump, but it is sitting idle – the corporate sector continues to be a net lender. Therefore to end the crisis the government should consider temporary measures to access these huge cash balances for investment purposes – taxes, levies, windfall payments and so on. These should be directed to key sectors of the economy which suffer a chronic investment deficit, infrastructure, rail, ports, broadband, health and education and so on.

The opposite course advocated by IBEC has already failed repeatedly. This is because it runs counter to the most basic tenets of economics. The investment of savings, primarily from households, is the key to future prosperity. Reducing those savings and reducing investment is to repeat the failed nostrums that caused this crisis.

Guest post by Dr Pauline Conroy: Welfare for work

Pauline Conroy: The proposal that 10,000 unemployed people will be offered 19.5 hours of social or environmentally useful work a week is an answer to a question that few are asking. The question ought to be: how can the economy provide skills, further education, creative opportunities and decent employment for those the tens of thousands who are unemployed?

Instead, we are offered a solution to the question:
How can the government force ever growing numbers of unemployed people into a state of submission and subordination on the labour market?

The OECD has examined in detail Ireland's approach to and outcomes of labour market activation programmes (Working Paper No.75 8. January 2009). They note criticisms of Community Employment Schemes relating to limited impact on regular employment, limited training content and repeat participation. The OECD observed tha,t while Community Employment was supposed to be a training and stepping stone to regular employment, in fact it became a form of subsidised employment for those with 'reduced work capacity' and a form of funding of social services (page 103).

My own studies of some of the schemes found that they were recipients of large numbers of lone parents who had not been referred for skills training from which they might have benefitted, and people with disabilities who wanted part-time employment in a more sheltered environment than the open competitive labour market could provide.

The OECD recommends that, if creches are needed or maintenance of the local environment, these services should be purchased by local government at prices that reflect cost rather than the coincidental availability of Community Employment Schemes (page 136).

The suggestion that the unemployed should provide free labour is certainly likely to depress the lower levels of wages on the labour market. That pressure is already present.The minimum wage of less than €9 euros an hour is not obligatory in several regards. It is not obligatory for young people taking up their first job or for people with disabilities who have less perceived productivity compared with others. It is not obligatory in those instances where potential employees are asked to start out on probationary periods or internships.

Perversely, the Minister's proposal may actually displace existing volunteers who are not registered as unemployed.

The proposal to engage 10,000 unemployed should be scrutinised as to its specific objectives and whether these can be achieved in the current labour market context, consistent with such objectives as increasing the education and training levels of the population and providing decent work for all.
Dr Pauline Conroy is an independent social policy analyst

TASC presentation on the Minimum Wage

The Minimum Wage presentation given by TASC yesterday to the Oireachtas Joint Committee on Enterprise, Trade and Employment is now available for download here.

Prices and profiteering in the food sector

Michael Taft: There will be many attempts to explain the high costs of food and beverages in Ireland – a state of affairs that is hardly new. Everyone throughout the food supply chain, from the farm-gate to the retail shelf, will be blamed and will seek to lay the blame somewhere else. I’d like to highlight one aspect – profit levels in the food and beverage manufacturing sector. This is not the full explanation for high food and beverage costs; but any explanation that doesn’t factor in our extra-ordinary profit levels will be unsatisfactory.

There are three databases that refer to profit levels (or ‘gross operating surplus’ or ‘capital compensation’).

First, is the Eurostat dataset that measures gross operating surplus as percentage of turnover; in other words – how much turnover is taken as profit. The latest year we have data for this measurement is 2003. After that, Irish data is not disclosed on the grounds of ‘confidentiality’. But in that year, Irish profit levels headed the table by a long ways. Nearly a quarter of turnover was taken as profit. With the exception of the UK, profits made up less than 10 percent of turnover in other EU countries for which we have data.

The second measurement is contained in Eurostat’s European Business statistical book 2007. While this contains the same numbers as the Eurostat dataset, it provides nominal turnover and gross operating surplus numbers. From this, we can assess what would happen if Irish companies took the same amount of profit as other countries and reduced their prices accordingly.

• If Irish companies took the same amount of profit as UK companies, food and beverage prices could be reduced by 10 percent.

• If Irish companies took the same amount of profit as other non-UK EU-15 countries, food and beverage costs could be reduced by between 14 percent and 17 percent.

The third measurement comes from the EU Klems database. This has the advantage of having more current numbers – from 2007 with the ability to measure profits per employee hour worked in the Food & Beverage sector. This shows an even more dramatic gap between Ireland and the Eurozone.

Ireland is well ahead of the game, making well over four times the Eurozone average. If the profit take in Ireland were at Eurozone levels, prices could be reduced by 16 percent.

In all these measurements, however, there is a problem – the statistical distortions created by the accounting activities of multi-nationals which, through transfer-pricing, use Ireland as a tax-laundering stop-over. It is difficult, though not impossible, to assess the extent of these distortions. In the Food sector, such activities would be less than in the manufacturing sector at large. Indigenous companies make up nearly half of all turnover in this sector (as opposed to 21 percent for all industries). However, in the Food sector anyway, it is difficult to see profit levels returning to European averages even taking into account multi-national accounting activities, though I will try to follow this up in a subsequent post.

The only organisation that has considered this issue in any depth is UNITE the Union, with its publication, ‘The Truth About Irish Profits’. It took a similar approach – using European data – to assess the contribution of high profits to high prices.

This is only the manufacturing sector. A broader analysis of profit levels would have to be conducted in all elements of the food supply chain – wholesale, retail, input costs, etc. But it is clear that high, potentially inexplicably high, profit levels may be contributing to high costs.

PS: For the real devaluationists among you, labour costs can’t be blamed for high costs. Irish labour costs per hour in the Food & Beverage sector were in 2007, according to the EU Klems, 9 percent below the EU-15 average and 21 percent below our peer group (non-Mediterranean countries).

Unaffordable commentary

Michael Taft: We will never find the answers to our severe economic problems until we ground our debate in facts. Take the issue of wages and labour costs: Dr. Garret Fitzgerald makes a specific assertion as to what contributed to our economic ills:

‘. . . before the housing bubble and bank collapse, we had allowed unsustainable prosperity to mislead us into paying ourselves unaffordable wages, salaries, and bonuses – sums that ran far beyond the capacity of any European country.’

Unaffordable wages? Beyond the capacity of any European country? How valid is this assertion? Not very. Not very at all. Let’s look at three sectors, courtesy of the EU Klems database which measures labour costs, productivity and capital compensation. All figures relate to the latest year we have data for – 2007.

Manufacturing

Irish labour costs in manufacturing are low in comparison with our EU trading partners – extremely low. We rank 12th with labour costs running at €20.76 compared to an EU-15 average of €25.03. Labour costs in our peer group (excluding the four poorer Mediterranean countries) averaged €28.90. On this basis it can hardly be argued that our costs are in anyway ‘unaffordable’.

There is the argument that wages have grown too fast? This, again, is a misconception. Irish labour costs rose by €5.20 per hour between 2000 and 2007. The average rise in the other EU-15 countries was €5.20. Our labour costs rose at the average level. The average rise among our peer group was even higher – €5.85. So in this category our labour cost rise was lower than average.

The misconception about our labour costs is based on a statistical sleight of hand. A number of commentators point to the percentage rise in labour costs. In this calculation, Irish labour costs rose by 33.4 percent compared to a rise in other EU-15 countries of 26.4 percent (our peer group percentage increased by slightly less at 25.4 percent). Why is this? Very simple: our pay rises started from a lower base.

So, in manufacturing – a key sector which is more exposed to international trade than almost any other sector – our labour costs are low and our increases have been low to average.

Wholesale / Retail

This labour-intensive sector represents over 20 percent of the labour force in the market economy (that is, excluding public administration, health and education). So while this is a non-traded sector, high labour costs – if they exist – will feed into higher living costs and drive up costs in other sectors. However, such high labour costs don’t exist here.

In 2007, Irish labour costs in the wholesale/retail sector were €19.20 per hour, compared to an EU-15 average of €19.85. Our peer group average was even higher at €23.06. To reach our peer group average, labour costs would have to rise by a staggering 20 percent.

Labour costs increased by €5.72 since 2000 – compared to an average increase in the EU-15 of €3.59 and in our peer group of €3.99. But we were starting off a low-base in 2000 when labour costs were nearly 30 percent below peer group’s average. So the higher-than-average increase since 2000 represented a catching-up. We are still catching-up.

Public Administration

Turning to the public sector, we find a similar pattern. Using public administration (unfortunately, in the health and education sectors there is no distinction between public and private sectors), we find that Irish labour costs were €25.88 per hour in 2007. The EU-15 average was €27.90 while our peer group was €30.16. Irish public administration costs are below average – and in comparison with our peer group, over 16 percent below average.

Since 2000 Irish public administration labour costs rose by €6.29 compared to an EU-15 average of €5.85 and our peer group average of €5.69. Therefore, labour cost increases – even with benchmarking – were only slightly above EU averages and still leave costs in the lower half of the league tables.

* * *

Unaffordable? Hardly. Our labour costs in these three key sectors were, in 2007, below EU-averages. In our major traded sector – manufacturing – increases in the previous seven years did not exceed average increases in the EU. And while in the wholesale/retail and public administration sectors increases were above average – we are still left below average; in relation to our peer group, substantially below.

Of course, one could argue that we must factor in productivity and that is a valid argument (if we did, we’d find some sectors highly productive, some sectors less so; and in some sectors we can’t measure productivity because of the operations of multi-nationals). But that’s not what Dr. Fitzgerald argued. He asserted our wages were unaffordable – so much so that it couldn’t be afforded in any other European country. Yet we saw in the manufacturing sector that European countries actually did afford these increases – indeed, they afforded more.

If this is the case – and if it is the case that our cost base is high – then banging the labour cost/wages drum is merely a diversion. It diverts us from the substantial cost and structural issues in our economic base. If this continues, we will not only lose the plot, we will lose our ability to grow our economy, grow our productivity and grow our efficiencies.

All because we didn’t look up basic facts; and because we listened to those who didn’t either.

Guest post by Anne O'Brien: Reconstructing the Tourism Economy

Anne O'Brien: The volcanic ash crisis is not the only problem facing the Irish tourism industry this summer. Other, less dramatic and less publicly discussed problems exist, which will fundamentally influence if or how the sector recovers following the crisis post-2008.

The twentieth year of impressive continuous growth for the Irish tourism sector was marked in 2007. While in the late 1980s tourism arrivals were at 2.4 million, the industry employed 69,000 people, and revenue earnings were £1,153 million (€1,459 million) (Bord Fáilte, 1992) by 2007 tourist arrivals achieved a peak of 7.7 million, the industry employed 322,000 people and revenue earnings were €6.45 billion (Fáilte Ireland, 2008).

However, in the latter part of 2008 Irish tourism collapsed dramatically. The decline began in the third quarter with 174,000 less overseas visitors travelling to Ireland. In total overseas visits to Ireland decreased by 4% in 2008, despite a growth of 2% in world arrivals. Nonetheless, a total of 7,435 million overseas visitors came to Ireland in 2008 and 8,339 million domestic trips were taken, tourism contributed €1.5 billion in taxes in 2008 of which €1.1 billion was from foreign visitors (Fáilte Ireland, 2008). In 2009 the decline continued and the total number of visitors to Ireland was down by 11.6% to a total of 6,927 million (CSO). Business trips were down 20.5% (and spending down 25%). Overnights in hotels were down 19.7% (Guesthouses and B&Bs 20.6%) Total earnings from tourism were €3,879 million (CSO).

The crash has impacted in particular on the hotel sector, in part because accommodation constitutes a large proportion (28% in 2009) of the tourist spend in Ireland. Also the domestic market was heavily hit by the Irish recession, and the hotel sector had become increasingly dependent on the domestic market in recent years. In 1997 the domestic market accounted for just 46% of all hotel guest-nights, by 2008 this figure had risen to 65% of all guest-nights (Howarth, Bastow Charleton, 2008 & 2009). For hotels, lower demand was thus a problem but this was further aggravated by massively increased room stock capacity, which was at its highest level ever (58,467 rooms in 905 hotels). Since 1997, over 30,000 additional rooms and 480 new hotels had been built, representing an investment of €4 billion, and room stock had increased by 98.7% over the previous ten years (Howarth, Bastow Charleton, 2008).

Investment in the hotel sector grew after 1987 when the Business Expansion Scheme introduced tax incentives for tourism facilities, including accommodation. Between 1996-2006 the number of rooms doubled from 26,000 to 52,000 (Fáilte Ireland). In 2007 “the conclusion of the building boom in hotels brought over 8,000 new rooms to the hotel stock” in that year alone (Howarth, Bastow Charleton, 2008). Since 2003 the number of hotel rooms grew more rapidly than demand but the domestic market maintained occupancy until the crash in 2008 when the level of oversupply became obvious. For over a decade investment in Irish hotels came, not from sound fundamentals within the sector, but from the existence of capital tax allowances.

The Bacon Report in November 2009 outlined how hotel-construction tax breaks had distorted the market, by generating an oversupply of rooms. Accelerated tax allowances had been available for investment in hotels since the Finance Act 1994 and only terminated in 2006. Under the incentives investors in hotel property development could claim 15% of the capital cost of a hotel for each of the first six years of operation and the remaining 10% in year seven, against tax liability.

The Bacon Report details the vested interests that gained from these incentives by outlining a scenario where a developer applies for planning for a mixed development. As part of the planning process planning authorities would request the inclusion of a hotel development – on the basis that tourism is promoted, local employment provided, development levies are paid to the local authority, the hotel is a basis for rates payments to the local authority and the hotel constitutes a facility for local residents. The developer subsequently allocates some land and plans for a hotel with, for instance, 50-60 rooms and a construction cost of €10 million. He or she can maximise the ‘cost’ of the hotel end of the development and in this way get the tax incentive on access infrastructure costs. The developer and some ‘high net worth individuals’ with large tax liabilities for the following 7 years, fund the €10 million. In return the investors will get tax allowances of €4.2 million, and agree to fund the developer €2.1 million. The remaining €7.9 million is funded by borrowing from a bank on an interest only basis (in the investors names but with no recourse to other assets). The hotel is built and leased to an operator, often as part of an international chain franchise. (The lease income is used by the developer to pay the interest on the bank loan). The tourism development agencies support this arrangement because the accommodation base is ‘strengthened’. The exchequer supports it because it raises new taxes. The banks get to provide a loan to ‘high net worth individuals’ ‘secured’ on a property. By 2008-09 the banks had €7 billion in loans to the hotel sector. At the end of the 7 years of tax relief the hotel and loans are transferred back to the developer or sold for a profit. The general idea is that “Unless property prices fall sharply, the sale will raise sufficient funds to pay the loan and provide a profit to the developer” (Bacon, 2009: 39-40).

As Bacon comments “None of these decision makers expect to experience a downside and so none of them examine the fundamentals of the hotel industry in order to question the justification of the investment” (2009: 39-40). The final result of the tax incentives was that there were 26,802 new rooms added to the register in the period 1999-2008, with an estimated total investment of €5.2 billion and debt of €4.1 billion, most new hotels had on average been insolvent since 2002, and the situation was particularly bad in respect of hotels constructed between 2005 and 2008 (These comprise 217 hotels with about 15,600 rooms) (Bacon, 2009:ii- iii). The Bacon Report bluntly stated with regard to tax relief based investment that “it was categorically not driven by the fundamentals of the hotel industry… the investments never made sense from the point of view of operating hotels and would have been insolvent if market conditions had stayed as they were at the time of the investment” (2009:ii- iii).

The Bacon report offers a solution of sorts to this problem, which involves the ‘removal’ of between 12,300 and 15,300 rooms from the market. However Bacon further proposed that ‘barriers to exit’ for insolvent hotels should be removed “without disadvantaging the initial investors… capital allowances that have already been claimed in respect of any hotel should not be subject to any claw back by the Revenue… (2009:iv). While Bacon claims that ‘The costs to the Exchequer of removing this barrier to exit would be zero given the situation that has arisen’ (2009:iv), in a previous post on progressive-economy.ie, Pentony argues that the total potential loss to the Exchequer amounts to a bail-out for developers and adds up to over €1.5 billion. Allowances yet to be claimed have an estimated value of €527 million and allowances already claimed, have a value estimated at €1 billion.

Against this backdrop, as part of the Government’s framework for Sustainable Economic Renewal Building Ireland’s Smart Economy, a Tourism Renewal Group was appointed by government to work on a development plan for tourism for the five year period 2009-2013. The report noted that Irish tourism has the capacity, if supported and developed, to deliver as part of an export-led economic recovery but the Chairman outlined a number of issues and priorities, which needed to be urgently addressed. These included maintaining investment in the brand, cutting access costs, providing access to working capital, maintaining state agencies and acknowledging nationally the role that tourism can play in economic renewal. The report set out a number of different scenarios for recovery and the ‘realistic scenario’ illustrated what could happen if the right steps were taken against a ‘challenging’ background. This Scenario

• Sees overseas tourists stabilising at 2009 levels and returning to growth by 2011 with modest growth of 3 to 4% per annum linked to 7.5 to 7.9 million arrivals by 2013.
• Revenues from these tourists would fall in 2009 and 2010 but would show modest growth in 2011-13.
• With regard to domestic tourism the report sets a target for growth by 2011-12 and a target of 8.3 million trips by 2013.

Mid term actions for recovery focused on key issues such as putting tourism at the heart of government, increasing the knowledge and innovation base of the industry, more marketing, retraining, sustaining investment in the tourism product (strangely investment in accommodation is still included), securing more World Heritage Site designations, more e-commerce, focusing on leisure and business tourism, making access easier for tourists, keeping costs low and easing ‘the burden of regulation’(TRGR, 2009).


While Bacon comments that even if the group achieves its objective the growth signalled will not be enough to maintain many existing hotels, nonetheless there are some grounds for optimism. The UNWTO documents that while international tourist arrivals declined worldwide by 4% in 2009 this can be interpreted as a sign of comparative resilience when compared with the estimated 12% slump in overall exports (2010: 1). Moreover, in the last quarter of 2009 growth of 2% was recorded in international visitor numbers and the UNWTO forecast global growth in international tourist arrivals of between 3% and 4% in 2010. In an Irish context Howarth Bastow Charleton’s Hotel Survey for 2008 noted that effectively targeting business tourism will assist in alleviating some of the difficulties that the industry is facing. The introduction of the National Conference Centre to Dublin in 2010 was expected to create up to €50 million per annum for the economy and €1billion by 2012.

However the TRG report needs to get to grips with some fundamental problems within Irish tourism, which have existed since the early 2000s, and which don’t simply concern volcanic ash. As outlined above, there is a structural issue with the hotel sector - average room occupancy rates have been declining since 2000, and there’s a surplus in supply that needs to be addressed. The political dynamics that underpinned the prolonged use of tax relief to incentivise private sector investment in an overdeveloped hotel sector needs to be examined so that it is not repeated. Cost competitiveness in Irish tourism began to deteriorate in the early 2000s. The industry claims this is due to relatively high labour costs, high domestic inflation and the strength of the Euro against the dollar and sterling (ITIC, 2008:3). Increasingly in media discourse of late the minimum wage (rather than, for instance, profit levels in the sector) is cited as central to the problem. This common misunderstanding continues despite TASC’s report ‘A Square Deal’ which points out that the abolition of wage agreements for restaurant workers will only heighten inequality and depress consumer demand and that removing wage agreements for restaurant workers would mean a reduction of just 61 cent per customer for a meal costing €60 for two.

A more relevant issue is signalled by Fáilte Ireland, which noted that visitor satisfaction with value for money declined consistently since 2000 when 63% of visitors found value for money in Ireland good or excellent, this declined to 45% in 2002 and to 16% by 2007 (Fáilte Ireland 2003 & 2007). A further fundamental problem is that there has been a serious lack of innovation and development of the tourism product in the last decade or two (which was not subject to the same tax incentive scheme as hotel development). However possibly most centrally, there appears to be a problem with the politics of tourism development. It has been generally accepted that the main driving force behind the major success of Irish tourism over the past 20 years was the private sector. And while agencies like ITIC and the IHF were undoubtedly key in the past, there’s a central need now for the state and its agencies to act not merely to protect the sector but rather to redirect its efforts and agencies to more effective ends, namely to generate a developmental growth strategy for the sector- one preferably not premised on the demise of the minimum wage!
Dr Anne O’ Brien is an academic co-ordinator with Kairos Communications Ltd. for Media Studies programmes at the School of English, Media and Theatre Studies in NUI Maynooth

ESRI commentary

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Really, McCoy?

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

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

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

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

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

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

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

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

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

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.

Retail workers - near the bottom of the HEAP

Last year, TASC and ICTU published the HEAP Report on income inequality in Ireland. Now, Mandate has published a report - Milking the Recession - showing just how little retail workers earn, and showing how some employers are 'milking the recession' to further depress retail workers' pay and conditions. Click here to read Eoin O'Broin's take on the report.