Thursday, 9 July 2009

Complexity of competitiveness

Paul Sweeney: The call by the head of IDA Ireland, Barry O Leary for a 15% pay cut for workers in state subsidised IDA firms displays a stunning ignorance of basic economics. Such a cut in wages would to nothing for Ireland’s competitiveness, as even a cursory reading of the reports of IDA’s sister organisation, the National Competitiveness Council will show this poor man.

Surely the IDA employs some economists to prevent CEO O’Leary from making such ignorant comments at the launch of its Annual Report. The complexity of competitiveness is well understood by the social partners and most economic policy makers, where wages are but a very small part of the issue and unit wages costs are much more important than actual wage levels. Of the many factors in the issue, education and training are probably the key, not wage levels. Up till now the IDA has obsessed on company tax as the key competitive advantage, a temporary advantage and out of Ireland’s control in the long run.

O’Leary is right to point out that Ireland has high costs, but this has been known for years. I pointed this out in the Irish Times in a table many years ago, showing that we were second only to Denmark in consumer price levels, arguing that a major contributory factor to this was high taxes on consumption and other administrative charges imposed by the state, as it cut direct taxes. Why did the IDA sit on its hands then?

Now with the crisis, caused by the property /bank bust, O’Leary thinks that the workers should pay. Not alone will they not take such cuts, but even if they did, it wont work. Does O’Leary think that if everyone works for a euro a day, we will have full employment? Hopefully, the Board of the IDA will send Mr O’Leary on a course on basic economics. If the board, chaired by former IBEC Director-General, John Dunne, (could there a coincidence of interests here?) does not do so, then the fine reputation of IDA Ireland will be diminished.


Patrick Kinsella said...

Even if the IDA boss was right (wages cuts lead to more jobs) we have to ask - with whom are we competing (on wages) and how far would we have to go?A good factory wage in Slovenia - EU member - is well under €500 a MONTH. We cannot live on that here. The root of high cost Ireland is not
wages, nor even taxes as Paul suggests, but in lawyers' fees, rents, utility costs and supermarket profits.
Patrick Kinsella

Slí Eile said...

Paul: An interesting feature of recent discussions on competitiveness is not only the absence of consideration of quality, productivity and knowledge-incorporated value-added (we could never compete, alone, on undifferentiated human capital costs since we moved up the value chain decades ago) but also the absence of discussion on non-wage costs which include:
Profit margins especially in particular sectors such as retailing;
Indirect taxes (as you point out)
Energy, administration and other costs associated with purchase of domestic output.
Considered in isolation, wage costs can make a difference. However, the bigger picture is how to upskill, boost domestic demand and compete on world markets through new and better quality products and services.