Thursday, 18 November 2010

Terry McDonough puts the Irish crash in a global context

"The current coalition’s ‘solution’ to the crisis is precisely the intensification of global neo-liberalism. Ultimate salvation will come from renewed international expansion – in the meantime, Irish banks are to be rescued unconditionally with wads of public money, while being maintained in private hands to the greatest extent possible. Social services and programmes are to be drastically cut to prove to international markets that Ireland is fiscally responsible. Wage cutting in the public sector is meant to signal open season on private sector wages and conditions, but falling wages and falling government spending will only intensify the crisis. Taken as a whole, this programme tries to solve the crisis on the backs of the ordinary Irish citizen. However, any remote possibility that this might work on its own terms has been lost as the revenues and savings are pumped into an insolvent banking system in order to rescue international bondholders – a strategy that threatens the state with bankruptcy". You can read the full text of Terry McDonough's article putting the Irish crash in a global context in the latest edition of The Citizen here.


Anonymous said...

Wage cutting in the public sector is meant to signal open season on private sector wages and conditions, but falling wages and falling government spending will only intensify the crisis.

What is the justification for this claim that elevated pay and conditions in the public service must be maintained in order to protect private sector workers?

Did any private sector employers follow the public sector model during the last decade and allow thousands of their employees to retire early at enormous expense? (otherwise known as cost neutrality in the Alice-in-Wonderland world of social partnership).

Did any private sector employers start granting their employees time off to cash imaginary pay-cheques, or ride fantastical pony-and-traps up from the country after Easter, or attend long-defunct race meetings?

Did any private sector employers follow every merger by keeping all duplicated functions intact, even when thousands of workers in the amalgamated entity literally had no work to do?

Did any private sector employers continue to pay performance bonuses to surplus staff consigned to the "rubber room"?

Did any private sector employers allow staff to dictate when and where they work even when there's a clear need for their services in another branch just down the road?

I think the answer to all the above is an emphatic NO! So why this assumption that cuts in the public sector have anything to do with with wage rates in the private sector? Pay rates had to come down in the public sector because we simply couldn't afford to have among the best paid public servants in the world when the country is, you know, like bankrupt and stuff?

Conor McCabe said...

No. The private sector didn't do any of those things.

What the private sector did was get private sector loans to build private sector buildings, and when it all came crashing down the private sector f**ked off and left us with the bill.

So, yeah. The private sector didn't do any of the things you mentioned.

all it did was bankrupt a country through using loans to invest in non-productive areas of the economy such as land speculation and private house construction.

Even better, the private sector borrowed money to launder it through section 23 tax incentives - set up by their Fianna Fail friends - the relief on which was such that the actual loan apparently paid for itself, and then some.

So yeah. Bankrupting a country through tax scams and speculation, and then pissing off once the going got tough.

That's all.

Anonymous said...

What sector is the Central Bank part of, Conor?

How about the Financial Regulator?

Or the Department of Finance who, ahem, actually designed those tax "scams" as you call them?

Sure there's all manner of touch-points, above board and below, between the State and the private sector.

But it ludicrous to claim that pay and conditions in the public sector act as any sort of bulwark protecting those in the private sector. Recruitment into the public sector is so rigidly structured (to protect the incumbents) so that its simply not an option for the vast majority of private sector workers to join the public payroll. So the idea of the brave public servants taking one for the nation by reluctantly holding onto all those juicy T&Cs is a patent nonsense.

Rory O'Farrell said...

It is fairly well accepted by almost all economists that, by virtue of being the largest employer, public sector pay rates affect private sector wages. Private sector wages also impact on the public sector.

Wages of other employers form part of the outside option in a wage bargain, whether wages are bargained collectively or individually.

At the beginning of the crisis the private sector mainly lost jobs. Then the public sector lost the temp jobs and pay rates. It was after this that we started to see movement in private sector wages. When public sector wages were cut it gave employers more scope to negotiate down private sector wages for those who had no cut and had kept their jobs.

Though its interesting to note the divergent pattern in private sector weekly and hourly earnings. Hourly earnings have held up well.

This is fairly interesting.

Anonymous said...


The unions were blue in the face over the last 12-18 months telling us that the expected paycuts in the private sector had not materialized.

The private sector cuts in numbers and hours did not follow on from the demonstration effect of paycuts in public sector. Rather they were a direct result of falling demand.

A typical private sector employer doesn't cut the hours of her employees because the nice lady who teaches her kids has taken a paycut. The hours are cut simply because there is less to do.

The teacher's pay rate is quite irrelavant to the calculation, as her employees are not in a position to leave and become teachers overnight. Not just because the state isn't hiring ... there are also all manner of structural barriers in the way of anyone entering the public service except at the very outset of their career.

Rory O'Farrell said...

@ Anonymous

You should check the link I posted for the moderate drop in hourly earnings in the private sector. You should also note the timing.

When wages are set in the private sector people look at the level of demand for the product which reflects the employers gain from the bargain (and demand is of course affected by wages for most products) and the outside option for employees.

To be honest, I can't think of a single academic, employer's representative, or union representative, who thinks that private and public sector wages are not linked.

About a quarter of employees are in the public sector. The notion that the wages of 25% of workers has no effect on the wages of the other 75% is at best fanciful.

laoise said...

Thanks, Terence, for your informative analysis. I'd be interested to know this: what are the main characteristics of the domestic policy of countries (such as Canada, Australia, Switzerland etc) who have not imploded, as Ireland has, after the international financial crisis?

Conor McCabe said...

@ anonymous

I gave an answer to your comment, but Progressive Economy took it down.

Anonymous said...


We should distinguish carefully between:

(a) the impact on aggregate demand induced by public pay-cuts (which may feed into pressure on certain private businesses and indirectly bring about cuts in jobs, hours or even pay-rates)

(b) the demonstration effect of public pay cuts being used to justify similar similar cuts in private sector pay rates

The fact that 25% of the workforce is in the public sector is only relevant if the two sectors are in direct competition for labour. In fact I would contend that they are not, as most public servants effectively decided to join the service at age 18 when filling out the CAO form and choosing nursing, teaching etc. or by applying to the Gardai, Army or civil service directly after the leaving cert. Most of the remainder would have decided to join the public service straight out of college at age 21 or 22. After that point, there is very little mobility between the sectors. So a private sector employer does not generally have to worry about employees leaving to enjoy the fruits of the public payroll, as that option is simply not open to the vast majority due to the rigidly constrained recruitment practices and the job-for-life mentality. No competition for labour implies little cross-impact on pay rates.

Now of course we have to pretend that such effects exist in order to justify exercises such as benchmarking. But no solid evidence was produced then that public sector pay rates were in fact below the private sector or that the public sector was having any trouble recruiting or retaining staff beyond normal wastage levels. The idea that teachers were abandoning the classroom for the trading floor was clearly a fallacy, as even a cursory glance at the CAO points trends over the decade would confirm.

Rory O'Farrell said...


The state plays a crucial role by virtue of setting norms.

Do you seriously believe that when construction had a large share of employment that construction wages didn't impact on other sectors?

In wage setting people compare their wages to lots of alternatives, even other occupations that they would not be qualified to do the job. This is where you get things like knock on pay claims.

It is broadly accepted (and backed up by evidence) that the state's role as an employer has an affect on the rest of the labour market. Have you any evidence to the contrary?

Anonymous said...

The construction industry would have only impacted on the wages in those sectors with which it was competing for labour.

So it would have driven up the wages of semi-skilled men in other sectors, but had much less effect on the pay-rates of women or white-collar workers.

I think you seriously overstate the role of the state as the setter of employment "norms". Otherwise the perks enjoyed by public sector employees would be widely copied in the private sector. In fact many of these T&Cs are virtually unknown outside the public sector. And its not just the anachronistic practices I'm talking about (such as the half hour off to cash an imaginary pay-cheque, or a day off to do the Christmas shopping). The private sector has not fallen over itself to copy newer concepts such as "cost-neutral" early retirement (where a teacher had to certify that they are incompetent and uninterested in their job before scoring added pension years worth hundreds of thousands of euros) or reduced working weeks (where nurses demanded they work shorter hours for no less pay) or extended career breaks (where jobs are held open for years on end while the post-holders prove to themselves that they didn't have a novel in them after all) or subsidized creches (where the progeny of public servants enjoy reduced rate childcare without any benefit-in-kind tax liability).

Rory O'Farrell said...

@ Anonymous

In reality, labour and product markets are not neatly delineated into NACE categories. You simply can't isolate one sector from another. The state does employ electricians and plumbers. The public sector of the labour market isn't quarantined somewhere.

I don't overstate the norm setting role of the state. I never said that it determines what happens in other sectors. It simply has an influence.

Anonymous said...

The public sector of the labour market isn't quarantined somewhere.

Quarantine is actually an excellent metaphor.

Excluding the health sector (which has its own worldwide traditions of very high mobility) there has been virtually no penetration of the public sector by immigrant labour. If it was a truly open market, one would expect highly qualified immigrants to have made some impression. Whereas in fact they are conspicuous by their absence in the core public sector, despite having made huge inroads in the technology, financial services and construction sectors.

Even if there was an actual competitive cross-sectoral market for labour (which I'd contend there isn't), there's the problem of the informational deficit that would inhibit proper price comparison. Even public service insiders themselves wouldn't be fully aware of the total value of their compensation package (as the non-wage elements are very substantial but not easy to calculate) and certainly outsiders in the private sector wouldn't have a hope of doing an accurate comparison against their own salaries.

Also there is much immobility within the public sector itself, because of rigid hierarchies and the lack of incentive/compulsion to move following demand. So for example most teachers will spend their entire careers in the same school, regardless of the demand for their subject in that school or elsewhere, as otherwise they would lose their place in the pecking order. So many of the normal wage market dynamics simply don't apply in the public sector. Instead we see union-inspired wage demands that are based on an abstract sense of entitlement as opposed to anything related to true market dynamics.

Aidan R said...

This is an interesting article. But I can’t help but notice the absence of any discussion on the role of the Euro. This is a significant factor in mediating the 'global' dynamics of capital accumulation and its manifestation in the 'national' political economy of Ireland. The difference in Irish outcomes in wages, work and total 'factor productivity' pre-EMU and post-EMU (from 2000) is too significant to be ignored in trying to understand the dynamic and crisis in Irish liberal capitalism.
In relation to the discussion between 'anonymous' and Rory; it is fairly obvious to anyone who examines labour markets and wage setting that the interaction between 'sheltered' and 'non-sheltered' sectors of the economy is significant. It is hard to decipher who 'leads' on Irish pay rates but up until 2003 it was definitely the private sector.
The national wage agreements were a floor not a ceiling for most MNCs as evidenced by a recent ESRI report. Irelands centralised wage agreements are quite unique in European terms in that they are a) voluntary and b) exclusive in that no legal mechanism exists to extend beyond the unionised sectors. So, it is hard to get data on whether non-union private sector firms used the nominally agreed rates as a benchmark, a ceiling or a floor. According to the ESRI they were a competitive benchmark.

So, I would encourage anonymous to put aside his/her normative contempt for the public sector and actually examine - empirically - what is the case in how wages are negotiated in non-market institutional frameworks. There is simply no just thing as an automatic ‘supply and demand’ adjustment in wages in institutionally rich labour markets.

Anonymous said...

I would encourage anonymous to put aside his/her normative contempt for the public sector

Why do think there is contempt in my comments above?

Simply pointing out aspects of the current T&Cs enjoyed by public servants, and noting how these have not influenced employment policies in the private sector, is no evidence of contempt.

Similarly, pointing out the obvious lack of competition for labour between private and public sector employers does not indicate contempt.