Tuesday, 16 March 2010

Really, McCoy?

Michael Burke: In yesterday's Irish Times, IBEC's General Director Danny McCoy said wages increased much more rapidly in Ireland than in other countries in the Euro Area during the period from 2002-2008, precipitating a serious decline in competitiveness.

“As a result, unit labour costs increased by 31 per cent in the period, compared with an increase of 9 per cent in the euro area,” he added. “In a single currency, there is no currency depreciation option to restore lost competitiveness.
“This can only be achieved by unit cost reductions, brought about by a combination of pay reductions and productivity gains.”

Mr McCoy seems to be referring to the EU Commission's Euro Area Report, and its statistical annex, which tends to group data in five-year periods, and does so from 2002 to 2006, while also providing data for later years individually. However, while these do indeed show Ireland's labour cost rising by 30.9% over those years, the average rise for the Euro Area was 13.7%, not 9% as stated. (Perhaps the mistake made was to leave 2008 out of the equation for the Euro Area average, since then the total is 9.9%).

But these are nominal increases in unit labour costs, not real costs. In the table below that one (Table 28) these are also provided. On this measure, real unit labour costs in Ireland (nominal costs divided by the GDP price deflator) rose by 9.7%, nearly all of that coming in 2008 as output plumetted. The cumulative rise in the six prvious years was just 2.8%. And the average real chage in unit labour costs in the Euro Area was -2.7% 2002/08.

However, there was also a difference in the rate of growth in productivity. Irish productivity grew by 11.7% in 2002/08 compared to a rise of 7.4% in the Euro Area as a whole. So, Ireland's productivity rose by 4% compared to the Euro Average over the period (111.7/107.4) while Ireland's real relative unit labour costs rose 5.75% prior to the recession (102.8/0.973). According to EU estimates and forecasts for 2009/10, the overwhelming bulk of this modest relative change is already being corrected, 3.8%.

Of course, none of this tells us anything about the absolute levels of costs, or relative costs. Still less about competitiveness.

But the trends in the external accounts do highlight relative changes in competitiveness. Over the period 2002 to 2008, exports of goods and services grew at exactly the same rate as those from the Euro Area as a whole, while they fell by 3.4% in 2009, compared to a 14.2% fall for the Euro Area. Imports also grew at exactly the same rate as the Euro Area 2002 to 2008 and fell by 8.5% compared to 12.5% for the Euro Area as a whole in 2009. This less pronounced decline in imports is associated with the much stronger export performance; as everyone knows, a large proportion of Ireland's imports are for re-export.

There is nothing in these data to support the IBEC assertions that rising unit labour costs have led to a loss of competitiveness. Despite that, the clamour for lower wages is unabated.

Perhaps, if Mr McCoy remains anxious on the issue of competitiveness, he could suggest to his IBEC members they address its key determinant, namely investment? Investment in equipement has fallen by 37.6% in the last 2 years in Ireland, compared to a 16.6% fall in the Euro Area as a whole.


Proposition Joe said...

But the trends in the external accounts do highlight relative changes in competitiveness.

Do they, though?

Have you figured out some way of striping out the distortionary impact of transfer pricing? Our competitiveness could have gone to pot altogether and it would still pay some MNCs to continue as before just to take advantage of the low corpo tax.

Michael Burke said...

@ Proposition Joe

A supposition built on a false premise.

Exports have been rising, not just continuing "as before". According to CSO 2009 imports are 200% higher than in 1990 in volume terms, whereas exports are 385% higher. If this were just transfer pricing, the volume ratios would be unaltered.

Proposition Joe said...


There are several ways in which the import:export ratio could change in this way while transfer pricing remains the main driver. The "false margin" could have been increased over time by the MNCs involved as they realize that they can get away with murder with the US tax authorities. The "real margin" could have increased because of innovation and/or market manipulation (plenty of both activities are attributable to the pharma and software industries). New entrants to the transfer pricing game could have started adopting the practices of their fellow MNCs. Changes to commodity prices on the world market could have a large impact on import values ... etc. etc.

Conversely an unaltered import:export ration wouldn't have necessarily implied a constant level of transfer pricing activity either.

Anonymous said...

@Michael Burke
There has not been even a fraction of the scrutiny devoted to other costs in the economy as has been devoted to wages. Everything should be on the table. We have suffered a massive decline in output and are massively indebted so stimulus will not be enough. All costs need to come down including wages so that we can employ and earn our way out of this hole.

Antoin O Lachtnain said...

Well, debt, which is the cost of employing capital, is the other big cost, which is sort-of being addressed.