Monday, 25 January 2010

‘Ireland now needs to generate an internal devaluation, with prices and wages falling’

Slí Eile: So runs the recent ESRI Quarterly Economic Commentary (page 50).
A lot of the debate on competition and competitiveness is narrowly constrained to a view of the world that looks something like the world of ‘perfect competition’ learned for Leaving Certificate Economics: product homogeneity, perfect information, no barriers to industry entry or exit, costless transport etc. One of the features of the economy in the South of Ireland is not only its small size and trade openness but the fact that it operates with relatively diverse sub-economies.

Some recent posts and discussions on this Site have brought out the nature of these sub-economies:

* A heavily export-orientated multinational sectors specialising in certain market niches – pharma, chemicals, ICT etc, operating price transferring and profit displacement and with relatively lower labour cost input
* Some industries geared towards particular markets susceptible to currency movements (especially Sterling)
* A significant non-traded sector here wages, rents and profits are set domestically.
In discussing and measuring ‘competitiveness’ or any other macro-level phenomenon it is necessary to disaggregate somewhat. This is not to deny:

- The importance of labour costs in the total cost schedule facing enterprises
- The inter-connectedness between costs in the non-trade sector and the traded sectors

Has Ireland been losing competitiveness over the last decade? This turns out to be not so straight forward. As other posts have shown, the National Council for Competitiveness does not focus on wage cost competitiveness to anything like the extent that some commentators and media people do. The NCC Annual Competitiveness Report 2009 Volume 1: Benchmarking Ireland's Performance published last year devotes 130 pages including copious indicators and graphs to measure competitiveness (Volume 1 has the data – the recent Volume 2 published earlier this month focuses more on policy implications).

Labour costs feature in the NCC data and discourse – but very much as only one part
See page 65. There is a nice colour-coded display of green (good), orange (risky) and red (problematic) warning ‘indicators’. Unit costs in manufacturing industry is coded orange. However, on ‘non-pay’ costs the indicators are mostly red. They are:
  • Rents of industrial sites
  • Rents of office sites
  • Cost of high-speed internet
  • Electricity
  • Waste disposal
  • Accountancy fees
  • IT consultancy fees
  • Legal fees
  • Childcare costs
  • insurance
It argues that (p11)
In order for the economy to make the necessary transition from a reliance on domestic demand to sustainable export-led growth in the medium term, policies need to facilitate the convergence of Irish costs, charges, professional fees, rents and incomes/wages towards the levels of our trading partners.

Productivity and not just wage levels are important. Growth in productivity has been poor in the 2004-2008 period but there is evidence that the position has improved since 2008. For many exporting firms, labour costs account for over half of their input costs. While Irish pay and income levels are moderate when compared to other developed high income economies, wage inflation in Ireland was running at up to 50 percent higher than the Eurozone average during the 2004-2007 period. However, growth in labour costs slowed significantly in 2008 in Ireland relative to the Eurozone.

One way of calculating an overall measure of price competitiveness is to use the the Central Bank Harmonised Competitiveness Indictor (HCI). The value for HCI is determined by changes in consumer and producer prices relative to the main trading partners for this State and adjusted for change in the value of the Euro relative to other major currencies. The value of HCI (deflated for consumer prices) rose from 100 in 1999 to a peak value of 126 in mid-2008 and has fallen back to 121 in December 2009. By contrast, the value was just under 100 in December 2009 for the Eurozone countries (ECB Statistical Data Warehouse).

However, much of the increase in this Indicator from mid-2006 to mid-2008 was driven by the strong appreciation in the value of the Euro against both Sterling and the US Dollar.
See Box B in the CBI Quarterly Bulletin 2007 (2)

The US Bureau of Labor Statistics regularly publishes comparative data on pay rates. Hourly compensation rates here were, in 2007, above US values (Ireland = 117 and US = 100). However, the Eurozone average was 133. (Source: All Employees: Indexes of hourly compensation costs in U.S. dollars in manufacturing, 32 countries or areas and selected economic groups, 1996-2007)

Garret Fitzgerald’s claims
that Ireland has been losing competitiveness in the last decade as signalled by loss of world market share in goods industries. However, he concedes that Services have been winning out as goods industries have been displaced. Overall, the fall in exports in 2008 was surprisingly small, here (2.75% according to the ESRI), compared to other economies in the midst of a world depression. Not grounds for complacency – but surely not indicative of a sharp deterioration in competitiveness driven by rising costs in the non-traded sector?

The picture on exports is very mixed as the ESRI has pointed out in his recent
Quarterly:Exports of chemicals and related products increased by 12 per cent, driven by strong growth in pharmaceutical products and organic chemicals. Across the other broad categories, there were significant declines in the exports of electrical machinery and computer equipment; the latter is likely in part to reflect the relocation of Dell to Poland. Furthermore, there has been a fall in exports to the UK of over 16 per cent over the same period, this is most likely driven by the recent weakness in Sterling together with the weak performance of the UK economy.

At least a significant part of inflation in wage costs in the 1997-2007 period was driven by the property bubble – and that gives another story.

but, the ESRI give the show away on page 32 of the Winter QEC (Table 11)

Finally, the last line in the table can be viewed as an indicator of competitiveness. While it is not the case that there is some target level for labour’s share of output, the increase in the value of the variable into 2009 points to declining competitiveness. If our forecasts are correct, and in particular if wages fall by 2½ per cent in 2010, there will be a significant improvement in competitiveness and this is reflected in the fall in labour’s share in 2010 relative to 2009.

[The Table shows the share of labour in GNP rising from 47.7% in 2005 to 54.5% in 2009 and then falling back to 52.5% in 2010.]

This only goes to show that some things never change:
Profits drive economic activity
Profits decline in some sectors (like banking) and can trigger crises over in the real economy
Crises lower profits
To restore profits wages must be cut
This is the key to being competitive
Cutting wages, restoring profit levels.

Lets not mince words here. We are in the middle of a calculated competitive devaluation where wage labour and people on social welfare are seeing adjustments to restore profit levels and reassure the markets and raise confidence of investors and the ubiquitous god ‘consumer’. All the talk about pricing ourselves back into world markets is a proxy for shifting the share of national income towards profits as the banking and property bubbles burst and the real economy adjusts.


John Fitzpatrick said...

In 35 years of trade union activism I have never experienced a clearly biased attack on the lowest paid in Ireland, and what I find really amazing is the way RTE is facilitating this attack, which is in the main being orchestrated by the ISME which has been outside of all Partnership agreements.

I do not believe the majority of bosses would want their employees working for minimum wage. It seems the restaurants and hotel sector are the only bosses that want their employees working for minimum wage and less. What do they want slaves? The reality is if they can not keep their businesses profitable within the rules, then they are out of business, bye bye, end of story.

Paul Hunt said...

Excellent diagnosis. At last, a clear exposition of the real, underlying agenda: shifting the share of national income from labour to profits - and, what is even more damaging, an attempt to effect this shift while national income is barely increasing following a major decline.

But what of the response from the Left, unions and progressives? Seeking to reverse the cuts to public sector pay and the selective SW reductions is tactically understandable, but is strategically inept. The unions' offer of 'transformational' public sector reform in exchange for no effective pay cuts was thrown back in their faces. The Government is developing an appetite for this type of selective brutality and is seeing its poll ratings rise modestly.

Clearly, offering concessions to Government - that many on the Left would consider excessively self-immolating - in exchange for the prospect of far-reaching reforms in other sectors does not seem a feasible option. The first, and most pressing, task is to remove this Government. I have previously advanced my proposal on this.

But the second task is more important: crafting a programme of democratic and economic reform that will attract broad popular support. This must cast aside reflexive anti-market and pro-"big government" instincts. Irish capitalism has nothing to do with markets; the focus is on subverting markets, neutering regulation and capturing policy. The time for doctrinal purity is over.

Proposition Joe said...

The unions' offer of 'transformational' public sector reform in exchange for no effective pay cuts was thrown back in their faces.

There was a touch of the boy who cried wolf about this offer. Successive tranches of modernization and transformation had already been bought and paid for, but turned out to be little more than vapour.

Paul Hunt said...

@Proposition Joe,

We can continue to fight the battles of the past or we can seek to chart a path to a better future. It might be nice (and might make some people feel better if stocks and public floggings were re-instated) to be able to do both: to play the "blame game" and to advance. But we don't have that luxury.

Michael Burke said...

A very good post.

On pay, the fact that Irish hourly compensation rates are below those of other advanced EU countries AND that they have been rising more rapidly demonstrates that this was just a 'catch-up' efffect, a consequence of Ireland's stronger growth rates, which has been largely off-set by the higher inflation that accompanied highe growth.

Of course, it should be forcefully and repeatedly pointed out that ISME's members, even more than the bulk of IBEC member's, export barely a Euro between them. They are overwhelmingly petty producers who could not and dare not compete internationally.

Squeezed by Ireland's high cost base, the ravages of the recession and the long-term trends which tend to marginalise small businesses, their response is precisely, as you say, to restore profits by cutting wages.

Th government, and its academic supporters on this issue, are merely the mouthpiece for gombeen men, not the large, highly developed businesses who do compete internationally; and who clamour for investment.

This drive to cut pay, should of course be fiercely resisted as damaging to the material well-being of Irish workers, and to the wider economy. The point of agreement is on the high cost base, highlighted by the NCC. Reducing this would raise productivity and employment.

Paul Hunt said...


"Fiercely resisted"; but how? By taking action that will be more damaging to the economy and society? And play, even more, into the hands of the Government as it pursues its divisive policies? Bertie may have tacked to the left, but Cowan is writing off any gains made there and is focused on shoring up his core, tribal vote.

And yes, agreement on the high cost base and, possibly, some recognition that policy and regulation in the state and semi-state sectors contributes as much, if not more, to this high cost base as the profit-gouging of the gombeens. But where are the worked out and costed proposals for reform?

And I wouldn't get too starry-eyed about the large, highly developed businesses who compete internationally. Market subversion, neutering of regulation and policy capture - as well as (relatively) free rides on infrastructure and human capital provision - are universal phenomena.

Anonymous said...

It is quite clear that the government has policy options other than cutting wages available to it. Many of these policies would appear to be in the interests of many businesses, especially the small and medium sector. For example, a stimulus package paid for perhaps by bring tax breaks in line with the European average is one of many alternatives that come to mind. What is interesting is why ISME (and others) are not supporting such measures. Although they have been very prominent in the media, I suspect that ISME are not the ones 'orchestrating' the drive for lower wages. Furthermore, although they have had many lobbying successes (see their website), I think the main architects of policy are the larger corporations especially the multinational sector. So why are we hearing so much from ISME? Dean Baker, one of the few American economists to emerge from the credit crisis with enhanced credibility, in his excellent book 'The Conservative Nanny State' argues, 'Small business owners...provide a cover for policies that redistribute wealth upwards'. They have 'more appeal to voters'. I think that explains their prominence in the media. The image of the small business owner struggling to keep afloat using his/her initiative, creating jobs and growth for the rest of the population has a lot of appeal. Calls for wage reductions are more likely to gain support among the public if it comes from the aforementioned 'innovators' rather than from some wealthy CEO like Michael O'Leary, for example. I think the corporate sector is essentially outsourcing public relations and that explains why we are hearing so much from ISME, though I'm not denying that they are taking a hammering.

Michael Burke said...

@ Anonymous

There are, no doubt, many large firms who want take the opportunity to lower wages. But it is clear that large outward-facing firms like Quinns and Intel have been campaigning openly for increased investment, not lower wages. This is because their competitiveness is improved by investment, whereas lower wages are marginal to it.

@ Paul Hunt

We seem to have hit on the nub of our disagreement.

My view is that, in general, anything which benefits the low-paid, ordinary workers and those on benefits necessarily benefits society as a whole. In the current crisis, the driving forces behind the recession are plunging investment and household consumption. Quite directly, anything which improves either of those sectors will improve the economy as a whole.

This government and its supporters have led an attack on both.

Not only is it morally justifiable to fight back against that, it is an economc necessity.

Robert Sweeney said...


I'm not denying that many outward firms have been campaigning for and would benefit from greater investment, not lower wages. I also believe that greater investment would also actually benefit many of those firms that have been campaigning for lower wages. My main point was that the prevalence afforded to ISME could be explained by the fact that the public would be more willing to accept lower wages if it came from small business owners, in the interests of the larger, more outward looking corporate community. However, as this and other posts on this websites have suggest, reducing wages would not be as beneficial to the export sector as say reducing energy costs or commercial rents. Having said that, why would the corporate community campaign for lower wages when it may not be in their short term interests? Many have suggested that policymakers are blinded by neoclassical theory. Undoubtedly that is true, but I don't think ideology exists in a vacuum, and there is usually some material interest behind it. David Felix of the university of Iowa I believe, apparently theorised in Challenge Magazine in the 1990s that in relation to a Tobin tax,

"nobody knows for sure, but it could well work, it could very well shift capital from economically useless purposes, in fact, economically destructive purposes, to more productive investment. It could very well have that effect. But even the sectors of private capital that would benefit from it have not supported it. He argues that the reason is the overriding class interest, which overcomes their narrow profit interest. The overriding class interest is to use the fiscal crisis of states to undermine the social contract that's being built up- to roll back the gains in welfare, union rights, labour right, and so on. That interest is sufficient that they are willing to see this instrument used to cut back growth in investment, even the sectors that would benefit from it"

[the above is Noam Chomsky commenting on David Felix's work in his 1996 book Class Warfare, page 139 - I don't have access to periodicals and old editions of magazines so I couldn't locate the original article by Felix himself]

It would definitely appear that many businesses are opposing policies that would be beneficial to them, and it may be that there is an overriding class interest to rollback the welfare state. I'm not saying I think Felix's analysis is correct or not - it's food for thought though.

Robert Sweeney

Antoin O Lachtnain said...

What is the alternative? We could just borrow up to the hilt to pay those in secure jobs more than the going rate and to carry out large-scale infrastructure developments we don't really need. But surely that is what we are trying to get away from? We need to get away from reckless, relentless spending (which is what has been happening in the housing sector up to now) not doing more of it in the public sector.

In relation to cafe owners wanting to pay a lower wage - current wages are unsustainable for many small businesses, outside Dublin in particular. If you are making 1.50 euros margin on a cup of coffee, you need to sell 7 of those, or one every 8 minutes just to pay one member of staff and their PRSI, before you consider having a second member of staff or make any contribution to rent, heat and light and all the rest of it.

How is that sustainable in a small town? What mathematics can you apply to it to make it work? Should these business be driven out as John Fitzpatrick suggests? I say that not so much out of concern for small business owners, but for the people who depend on those businesses for jobs and as a social amenity.

We need to start thinking about sustainability and adding value rather than focusing on maintaining nominal wages alone.

Paul Hunt said...


Not sure about hitting "the nub of our disagreement". Robert Sweeney and Anonymous make valid points about class interests and opposition to "big government". Where we disagree, if at all, is on the balance between markets and government. My key point is that, internationally, we've had subversion of markets, neutering of regulation and capture of policy. And those who demanded "free markets" fell into the arms of the taxpayer when their folly destroyed their businesses. I want to give those who demand "free markets" real markets - hard and sharp - subject to effective policy and regulatory control. I find it naive - and unsupported by evidence - to believe that governments can do most of what markets can do. The task is to fix policy and regulation subject to effective democratic governance. Trying to resolve policy and regulatory failures by increasing the role of government is a recipe for disaster. Already we are seeing pressures to roll back the state despite its necessary interventions to address the current crisis.