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.

Posted in: Labour market • Labour market

Tagged with: Wages • Productivity