This post was written by Professor Terrence McDonough of the Department of Economics in NUIG in May. Given the current debate on pay levels (whether in the public sector or for those on the minimum wage), it seems appropriate to bring it to the top again.
Terry McDonough: When Ronald Reagan wanted to send a message to unionized workers across the American economy, he picked a group of public employees, the air traffic controllers, and broke their union. Ironically, this union was one of the few that had endorsed his candidacy for president. Margaret Thatcher followed a similar strategy with the miners. When the current coalition government decided that their only strategy for recovery was repairing Ireland’s competitiveness through across the board wage cuts, there was only one way to announce their intentions. They picked on public sector workers and announced a wage cut.
Brian Lenihan has bragged that we Irish have an amazing capacity to take pain and that if such a cut had been announced in France there would have been riots. How did he get away with this in Ireland?
First, a carefully orchestrated campaign in the media stirred up begrudgery about public sector pensions. The pay cut was labelled a pension levy and the impression was given that it would go to help pay for these ‘Rolls Royce’ public sector pensions. Public sector unions felt exposed by the lack of support from fellow citizens in the private sector and accepted the cut. Support for the pension levy by private sector workers ignored the fact that they were next in the crosshairs. Irish private sector employers had got the message. It was now open season on wages.
Just as an ESRI report had earlier announced the start of the Irish recession, their latest report predicting a 17 percent unemployment rate amounts to official notice of an Irish depression. The ESRI’s solution? They joined a chorus of other economists and commentators calling for a fall in wages. Garret Fitzgerald’s recent column in the Irish Times was headlined “reduced pay could be silver lining of crisis.” Despite this apparent consensus there are sound economic reasons why wage cutting in the Irish economy is far from a good thing.
First, 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.
Secondly, falling wages directly damage demand, cutting sales and creating further unemployment. An environment of wage cutting creates insecurity and reduced spending.
Thirdly, 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.
Fourthly, inequality is at the root of the international crisis. Across the board wage cutting will make the problems worse. Stagnant wages led to low levels of demand for consumer goods, leading investors to put their money into financial markets instead of productive investment. This led to a flood of lending to cash strapped consumers and fuelled the housing bubble. When this bubble burst a credit crisis combined with stagnant wages to create a demand crisis. This demand crisis will still be with us even if the banks are repaired.
Fifth and 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. In the age of globalization, transnational corporations locate different parts of the production and distribution process in different kinds of places. Where they will find attractive for a particular function in the future is very hard to predict.
There are two lessons here. The first is that Ireland must be more self-reliant in the future. The second is that, against all the conventional wisdom, we should stop worrying about competitiveness. Rather we should set about building the society we want. We should be seeking high levels of equality and well-being (recent scientific studies show the two are closely connected), high levels of health, high levels of education, high levels of culture and self-expression. If we have a well functioning society, not just an economy, we will find that we have no trouble participating in the international economy and even attracting foreign investment if that is one of the things we want. Now that social partnership is in trouble, there is no reason unions and other social organizations can’t still do their bit for recovery. They can contribute a great deal by doing their day job – defending working people’s living standards and fighting for greater levels of social justice.