Sunday, 23 May 2010

Unaffordable commentary

Michael Taft: We will never find the answers to our severe economic problems until we ground our debate in facts. Take the issue of wages and labour costs: Dr. Garret Fitzgerald makes a specific assertion as to what contributed to our economic ills:

‘. . . before the housing bubble and bank collapse, we had allowed unsustainable prosperity to mislead us into paying ourselves unaffordable wages, salaries, and bonuses – sums that ran far beyond the capacity of any European country.’

Unaffordable wages? Beyond the capacity of any European country? How valid is this assertion? Not very. Not very at all. Let’s look at three sectors, courtesy of the EU Klems database which measures labour costs, productivity and capital compensation. All figures relate to the latest year we have data for – 2007.

Manufacturing

Irish labour costs in manufacturing are low in comparison with our EU trading partners – extremely low. We rank 12th with labour costs running at €20.76 compared to an EU-15 average of €25.03. Labour costs in our peer group (excluding the four poorer Mediterranean countries) averaged €28.90. On this basis it can hardly be argued that our costs are in anyway ‘unaffordable’.

There is the argument that wages have grown too fast? This, again, is a misconception. Irish labour costs rose by €5.20 per hour between 2000 and 2007. The average rise in the other EU-15 countries was €5.20. Our labour costs rose at the average level. The average rise among our peer group was even higher – €5.85. So in this category our labour cost rise was lower than average.

The misconception about our labour costs is based on a statistical sleight of hand. A number of commentators point to the percentage rise in labour costs. In this calculation, Irish labour costs rose by 33.4 percent compared to a rise in other EU-15 countries of 26.4 percent (our peer group percentage increased by slightly less at 25.4 percent). Why is this? Very simple: our pay rises started from a lower base.

So, in manufacturing – a key sector which is more exposed to international trade than almost any other sector – our labour costs are low and our increases have been low to average.

Wholesale / Retail

This labour-intensive sector represents over 20 percent of the labour force in the market economy (that is, excluding public administration, health and education). So while this is a non-traded sector, high labour costs – if they exist – will feed into higher living costs and drive up costs in other sectors. However, such high labour costs don’t exist here.

In 2007, Irish labour costs in the wholesale/retail sector were €19.20 per hour, compared to an EU-15 average of €19.85. Our peer group average was even higher at €23.06. To reach our peer group average, labour costs would have to rise by a staggering 20 percent.

Labour costs increased by €5.72 since 2000 – compared to an average increase in the EU-15 of €3.59 and in our peer group of €3.99. But we were starting off a low-base in 2000 when labour costs were nearly 30 percent below peer group’s average. So the higher-than-average increase since 2000 represented a catching-up. We are still catching-up.

Public Administration

Turning to the public sector, we find a similar pattern. Using public administration (unfortunately, in the health and education sectors there is no distinction between public and private sectors), we find that Irish labour costs were €25.88 per hour in 2007. The EU-15 average was €27.90 while our peer group was €30.16. Irish public administration costs are below average – and in comparison with our peer group, over 16 percent below average.

Since 2000 Irish public administration labour costs rose by €6.29 compared to an EU-15 average of €5.85 and our peer group average of €5.69. Therefore, labour cost increases – even with benchmarking – were only slightly above EU averages and still leave costs in the lower half of the league tables.

* * *

Unaffordable? Hardly. Our labour costs in these three key sectors were, in 2007, below EU-averages. In our major traded sector – manufacturing – increases in the previous seven years did not exceed average increases in the EU. And while in the wholesale/retail and public administration sectors increases were above average – we are still left below average; in relation to our peer group, substantially below.

Of course, one could argue that we must factor in productivity and that is a valid argument (if we did, we’d find some sectors highly productive, some sectors less so; and in some sectors we can’t measure productivity because of the operations of multi-nationals). But that’s not what Dr. Fitzgerald argued. He asserted our wages were unaffordable – so much so that it couldn’t be afforded in any other European country. Yet we saw in the manufacturing sector that European countries actually did afford these increases – indeed, they afforded more.

If this is the case – and if it is the case that our cost base is high – then banging the labour cost/wages drum is merely a diversion. It diverts us from the substantial cost and structural issues in our economic base. If this continues, we will not only lose the plot, we will lose our ability to grow our economy, grow our productivity and grow our efficiencies.

All because we didn’t look up basic facts; and because we listened to those who didn’t either.

7 comments:

Michael Burke said...

The good Dr is frankly talking nonsense.

Real unit labour costs in Ireland across the whole economy fell for most of the period 1992-2009. The cumulative decline was 15.2% in Ireland, compared a fall of 5.2% in the Euro Area (source: EU Commission, Euro Area Report, Spring 2010, Table 28).

And the marginal impact on competitivenness (labour costs not being the primary determinant of relative productuivity)? In the periods 1992/96 Ireland's exports grew 7.9% faster than the Euro Area everage, 97/01 8.0% faster, in 02/06 they were level, and in the 3 years 2007/09 Ireland's exports rose 12.4% faster (Table 46).

Joseph said...

@Michael Burke

I would agree that the good Dr is talking nonsense but perhaps he was just thinking of the salaries that politicians pay themselves. I would love to see a ranking of salaries paid to heads of countries.

I know our beloved leader is paid more than Obama but wonder where he is in the overall scheme of things globally.

Anybody know where I can find such a league table?

antoin said...

For manufacturing, limiting the comparison to such a small, selective peer group doesn't make much sense. It is just too international a sector. Singapore would make more sense as a comparator.

For the public sector, I wouldn't think the issue is hourly or unit costs - the issue would seem to be the overall cost -. Our services are just not efficient.

tom said...

Antoin,

Aren't you doing just what the article criticises: making broad statements without substantiating them.

We hear over and over again how inefficient our public services are but no attempt is ever made to explain how this is measured or to what it is being compared. In my own experience, it is no more frustrating (and generally less so) to deal with the public service in Ireland than it is to deal with any large institution -

I'd rather have to deal with the county council, for example, than a bank. As a simple measure, call each of these and see how long it takes to find an actual person on the other end of the line.

I can only feel that the (unspoken) comparison is with the so-called efficient public services of other European countries. The fact that they spend more money on these services is of course lost in the unspoken comparison.

tom

antoin said...

Firstly, on your comparison - Do they really spend more on public services, when you take into account that we have a very small defence budget, we have a young population compared to the other countries, and a large proportion of our population are ineligible for free health care. We also have a lot of 'hidden' charges and taxes to access public services.

It is news to me if any public service in Western Europe is considered a model of efficiency. I could be wrong here and correct me if I am. Inefficiency is a problem across the public sector internationally.

Anyway, I didn't draw any comparison between public service efficiency in Ireland and anywhere else. You did. I said that they are not efficient. My basis for saying that has to do with the obvious high cost of inputs, not on the basis of comparisons with outputs.

In your comparison, you are equating, or at least measuring efficiency, by reference to customer service responsiveness at the first line. This is just not a good way to measure efficiency. (As it happens, you will generally get to speak to someone in Bank of Ireland faster than if you ring Dublin City Council. And which is more important, to have people answering phones, or people actually out there doing work and resolving problems?)

You are also comparing public services to an Irish bank. Irish banks are not models for efficiency. It makes no sense to make such a comparison on any level.

The problem with comparisons is that they can be used as bunkers to hide in and the original post is riddled with such bunkers. Both our public and private sectors have a habit of being happy to lurk around the middle of any league table. Rather than just trying to catch up, we should be striving to lead.

tom said...

Hi Antoine,

Thanks for the response.

You can certainly reject all my comparisons on the basis that I was putting words in your mouth. I was doing just that.

But I was doing so because you were providing no basis for comparison at all. You can't talk about efficiencies in terms of input only. It makes no sense. If you have no way of measuring efficiency, you surely can't complain about supposed inefficiency.

And the argument about a small army and restricted health service is also unsubstantiated.

Every body in Ireland is entitled to virtually free hospital care, which is where the huge expenses occur. Other countries also have various restrictions on primary health care.

And many euro countries have small armies: many of those that don't effectively transfer youth unemployment into military spending. The best and only available comparison is percentage of GDP. Yuo can certainly point out the flaws in the measure, but it seems quite a big step to argue that they somehow are proof that Ireland's spending is high.

antoin said...

Tom, some good points.

You are right to pull me up re inputs, I have not made myself clear. What I mean is that the State is paying too high a rate for services by any objective criterion, a higher rate than they are availabile in the market. I have seen this again and again. One example is transport. In the case of Dublin bus, it costs the state and the user a total of around 280m to keep 950 buses on the road. That's around 300,000 per bus, per year. The private sector could provide far more buses for the same cost. In public administration,there are 40 offices to administer car tax and driver's licences. This could be taken care of by a far smaller network, using the Internet and the postal system. Car tax could easily be collected as a levy on car insurance. I could go on.

For sure, though, there are some areas that are pretty efficient in the public sector.

On healthcare - a relative of mine spent a week and a half in a public hospital two months ago. The hospital sent a bill for ten grand. How can this be, if he is 'entitled' to free hospital care?

I have scoured the HSE website for mention of the entitlement to free hospital care. I cannot find it.

Youth employment in European countries - that is another big argument that could be had for sure! But this, and competitiveness are an issue for the whole of Europe, not just ireland. This is why I think it is dangerous and deceptive to rely on comparisons with the EU15 in particular. I know I am isolated in that view, but no one can tell me why I am wrong.

I also think the emphasis should be on efficiency and excellence, rather than trying to hit some historical benchmark.