Sunday, 3 January 2010

Finding facts in Fantasy Land

Michael Taft: One of my New Year’s resolutions was to spend less time on countering the arguments of the orthodoxy and develop positive analysis and proposals from a progressive perspective. For if you tried to even counter a fraction of the economic misinformation spread about, you’d never have time to work on alternatives. That was my resolution. But then I read Stephen O’Byrne’s piece in the Irish Times. My resolution went the way of stopping smoking, exercising more, and other noble aspirations.

Stephen exhorts the trade union movement specifically to live in the land of facts, not the land of fantasy. Always wise counsel. Too bad Stephen didn’t take it to heart before he penned his latest opinion piece. In it he argues:

‘Querying the affordability of the second highest (minimum wage) rate in Europe evokes howls from trade unions, but are we not are entitled to wonder how, say, our tourism industry can compete with the UK when our minimum wage is €2-plus per hour higher?’

Oh, of course, we are entitled to wonder (and if we stop, there’s always the Small Firms Association to do all the wondering we need). Let’s take a look at the hospitality sector and see how Irish costs compare with the rest of Europe, based on Eurostat data from 2006, a year in which our minimum wage was also the second highest in the EU.

First thing we notice is that average personnel costs in the Irish hotel and restaurant sector are below the EU-15 average: 3 percent below average. And this includes very poor countries such as Greece and Portugal. When we compare ourselves to our own peer group – the non-Mediterranean countries – we find that Irish labour costs in the hospitality sector are 6 percent below the average of other EU countries.

Another way of looking at this issue is to measure labour costs as a proportion of turnover. Again, in comparing ourselves with our peer group we find that labour costs make up less of turnover – 28.6 percent - than the average of other EU countries – 29.7 percent.

Yet, Stephen is concerned. How can we compete with UK tourism? Well, we’re competing ok. In the first quarter of 2000, Ireland had less than 5 percent of the UK’s level of tourist traffic (measured by Eurostat as all tourist nights). In the first quarter of this year that proportion increased to 8 percent, with more tourist nights per capita than the UK. If anything, tourist traffic is increasing, not decreasing, when compared with the UK.

Stephen finishes his article with this:

‘We need critical analysis, not hackneyed class rhetoric.’

Too bad he didn’t start with it.


Proposition Joe said...

Another way of looking at this issue is to measure labour costs as a proportion of turnover. Again, in comparing ourselves with our peer group we find that labour costs make up less of turnover – 28.6 percent - than the average of other EU countries – 29.7 percent.

Of course this can be achieved by employing fewer workers per enterprise, or by charging tourists more than they would be when visiting other EU countries.

Is either of those approaches a good strategy, do you think?

Michael Taft said...

Proposition Joe - not sure what you're getting at. If we start from a relatively low-wage level in the hospitality sector, can you provide some numbers to show what you're getting at. I have provided the links that might be of help.

Proposition Joe said...

Sorry Michael, I wasn't being quiet clear.

The point was simply that labour costs as percentage of turnover being in line with the European average isn't really a good indicator of wage rates themselves not being out of whack.

As a similar percentage of turnover could mask a lower number of employees per firm or an unsustainably inflated turnover due to uncompetitive pricing (given that the hospitality industry directly competes with other countries for the tourist dollar).

Michael Taft said...

Proposition Joe - I understand that. Are you saying that wage rate are out of whack given that our labour costs are lower than most other EU-15 countries? That's the main thrust of the post (the labour costs as a percentage of turnover was only suppelmentary).

Mack said...

Is it worth considering leaving the Euro and devaluing the new Punt as an alternative?

I haven't heard anything about how we could bring about a real devaluation wrt to debts yet (the achilles heal?).

Michael Taft said...

Mack - Apologies for getting back on this so late. I doubt that leaving the Euro would get to the root of our problems: a deflationary fiscal policy, an over-reliance on foreign captial, a weak indigenous enterprise base, a low-tax / low-spend economic model, a poor physical and social infrastructure, etc. In addition, I'm dubious about the amount of 'independence' and 'freedom' a new Punt would have. We might be giving up one set of monetary restrictions only to saddle ourselves with another set, albeit not necessarily formal. Ultimately, our problems are about more than our 'cost competitiveness'. At the end of the day, apart from Food, we don't have businesses that export.

Proposition Joe said...

Sorry again, Michael, I didn't realize the %-of-turnover stats were just intended as being supplamentary to the main point.

So considering that main point, the Eurostat numbers do indeed place Irish average personnel costs in the food & accomodation sector behind those of France, Italy, Austria, Finland, Sweden and Norway.

Note however that personnel costs are defined to include: "the social security costs
for the employer. These include employer’s social security contributions to schemes for retirement pensions, sickness, maternity, disability, unemployment, occupational accidents and diseases, family allowances as well as other schemes."

These employer social security contributions tend to be much lower in Ireland than in the other countries mentioned above. So essentially the state is allowing high basic wages to be paid, without damaging competitiveness to the extent one would expect, by imposing a smaller tax burden on employment.

But of course that tax revenue foregone must be made up somehow, and during the boom years it was largely covered by a windfall of exceptional trabsaction tax yield. Now that this has dried up, we're faced with the problem of re-tooling the tax system for higher and more reliable yield. But it would be very difficult to impose high employer taxes at this point, without wage costs also reducing. The other option is for the employees to bare more of the social security burden themselves, but of course the net effect on take-home pay could end up being similar.