The wooly mammoth conundrum

Michael Taft: How frustrating to read a generalised statement that has the hallmarks of authority but completely breaks down after a mere few minutes of looking up the facts. In the Irish Times this morning, Brian Devine – an economist with ‘stockbroking firm NCB’, is reported as making an authoritative statement:

‘The high cost of services used by business, ranging across accounting, law, waste disposal and energy, are seen as “non-pay” items, but Devine agrees wages in these are a big element of those costs, as pay accounts for 58 per cent of the overall economy.’

Now let’s look up some facts. First, that ‘pay’ accounts for 58 percent of the overall economy. The CSO’s National Accounts show that total ‘wages and salaries’ came to 47.6 percent in 2008. Now, this is a long ways off from 58 percent. Throw in employers’ social security contributions and it’s still a long ways (51 percent).

Of course, this ‘wages and salaries’ figures is not just about workers’ pay. It includes management and proprietary owners where they take income through wages, including their bonuses, benefit-in-kind, etc. The latest CSO data shows that management remuneration makes up over 36 percent of all labour costs in the manufacturing sector. I’ll go into more detail on this in a later post. Suffice it to say, when looking at gross wages and salaries in the economy – one has to remember this includes the pay, bonuses and benefit-in-kind of highly paid CEOs and senior management.

But let’s return to this alleged ’58 percent’ figure. It is cleverly used as an argument that wages are a big component of the high costs of services used by businesses. The equation works like this: Services are high cost, wages make up 58 percent of the overall economy; ergo, wages must make up a significant proportion of those high costs.

Neat. Except that those darned facts get in the way again. Let’s turn to the CSO’s Annual Services Inquiry. Unfortunately, the latest data we have is from 2006 – but these proportions don’t change much from year to year.

Under Business Services, there is helpful breakdown of the different services. These categories that I’ve selected make up nearly 90 percent of all non-real estate business services in the state.

What do they tell us about wages?

Wages, including employers’ labour costs (PRSI, etc.) make up 22.6 percent of total operating costs. Less than a quarter. In some sub-sectors, wages make up a higher proportion – in the more labour intensive business. But even here, we are light-years from the alleged ’58 percent’.

I have constructed a ‘real devaluationist’ test. With Dr. John Fitzgerald and others going around saying we need to cut wages in the private sector to up our competitive game – let’s test this. What would be the effect of cutting wages by 5 percent on the operating costs in these sectors?

1.1 percent.

Let’s put this in perspective. If there are problems with high costs, lack of competition, sheltered sectors, etc. – is reducing total operating costs by 1 percent really going to set things right?

Of course, this doesn’t take into account the fact that a significant proportion of these wages are management and proprietary owners/directors pay, bonuses and benefit-in-kind (and as we’ve seen before, they don’t do cuts – at least, not for themselves).

And this doesn’t take into account the deflationary impact on domestic demand – which would drive down income to other businesses selling goods and services into the domestic economy.

And this doesn’t take into account the deteriorating impact of the Exchequer deficit – less income = less tax revenue (income tax, PRSI, VAT, etc.).

So all this – to reduce operating costs by 1 percent.

It’s like taking a pea-shooter to hunt a woolly mammoth.

Posted in: Economics • Labour market

Tagged with: Deflation • Wages