Thursday, 14 April 2011

Myths of the Irish Crisis: Wages and Competitiveness

TASC has just issued a new discussion paper by TASC economist (and PE blogger) Tom McDonnell examining two distinct but related claims. First that Ireland lost competitiveness within the European Union in the last decade and second that high labour costs in low-wage sectors are contributing to the employment crisis.

Based on a review of the literature together with Eurostat data, the paper concludes that Ireland did not suffer an overall loss of competitiveness prior to the economic crash. The paper also refutes arguments that labour costs in the low-paid services sectors – sometimes viewed as undermining Irish competitiveness – are high by international standards. Instead, an examination of Eurostat data projects that 2010 labour costs were 9.3 per cent below the EU-15 average in the hospitality sector, and 8.8 per cent below the EU-15 average in the wholesale/retail sector. You can download Myths of the Irish Crisis: Wages and Competitiveness here.


Anonymous said...

Interesting paper with some useful data. I'm not certain that all points make solid inferences from the datum provided.

For example, point 11; the market share can be led by demand for goods or services with the associated costs having an impact but not necessarily in the manner suggested.

Rory O'Farrell said...

Very interesting comparisons of labour costs with the EU15 and EU27. It's further evidence that problems for hotels and restaurants have nothing to do with wages, and everything to do with the property mania.

And of course cutting wages means less money to spend in pubs and restaurants.

Tom McDonnell said...

Steve Kinsella makes the point in the guardian today that the crisis is one of demand rather than supply, and consequently the solutions to the crisis should focus primarily on the demand-side rather than on the supply-side.

I would agree that it is a demand-side crisis.

Paul Hunt said...

The demand-side aspects reflect the fact that demand was artificially high in the public period. The credit-fuelled demand for land, property and construction activity (supported by totally imbalanced and bubble-promoting taxation policy) has simply collapsed and there is a huge negative wealth effect with deleveraging across the board. Government spending in aggregate hasn't changed much since the bubble burst - though its composition has. Costs and prices in the sheltered sectors also took off under cover of the bubbles.

So while they might be useful for Eurocrats seeking to illustrate a policy point and make good copy in the print media - or for economic commentators with an axe to grind (for one camp or another), the prices charged by doctors, solicitors and pharmacists are symptomatic of a more deep-seated malaise in the sheltered sectors.

Somehow I doubt you're advocating a restoration of the level and composition of aggregate demand funded by the government, as conventional Government-directed demand-side stimuli are not really possible until a primary fiscal surplus is achieved. What could, of course, be tackled are excessive costs in the sheltered sectors. Reducing these would increase disposable incomes across the board, increase consumption, investment and employment - and increase tax revenues.

But there are so many deeply-embedded vested interests in both the public and private sheltered sectors who would be upset by this sort of talk that any mention of the supply-side is verboten and every effort is made to talk up the demand-side.

Tom McDonnell said...

hi Paul

Demand was artificially and unsustainably high and i'm certainly not advocating any attempt to restore the wildly distorted make-up of demand that prevailed in the lead up to the crisis.

Now however the economy is running well below its potential output.

I certainly wouldn't dispute that supply-side policies have a significant role to play, but cutting the disposable incomes of low-wage workers is likely to be counterproductive.

Professional fees, utility costs, lack of competition in the wholesale trade market, commercial rents and of course access to credit are all areas for immediate priority.

Education policy, innovation policy and industrial policy will all be critical in the medium-to long term. I suspect this is uncontroversial.

Rory O'Farrell said...

I agree with Stephen that its a demand shock. Cutting the wages of the low paid (which Tom has shown are already below average for western Europe) will further reduce demand.

However making doctor fees cheaper directly transfers money from relatively rich doctors to relatively poorer patients. It is the poorer who spend their money in the domestic economy. So I think reducing doctor/lawyer fees can be seen as a redistributive policy which boosts the economy as its a demand shock.

Some of the EU/IMF policies (like cutting pay of low paid, or the dole for long term unemployed) shift the money upwards and is further harming the economy.

So supply side solutions have demand side consequences. So these consequences must be taken into account.

Paul Hunt said...

@Tom McDonnell,

I'm not deliberately seeking out areas of disagreement. I'm pleased that you note a number of areas where supply-side reforms are vitally necessary. For example, I find the idea of retail competition in the utility sectors to be, in most cases, an excessively expensive and unnecesary burden on consumers and citizens. The benefits are to be gained via competition at the wholesale level - and this is true for other sectors as well. Furthermore, privatisation of some state-owned assets would generate proceeds that could be ring-fenced for further necessary investments, provide opportunities for Irish saving and pension funds and reduce the debt/GDP ratio. (Something along these lines may emerge from government, but I fear it will be the usual half-arsed exercise.)

And I am adamantly opposed to cutting pay and wages in the public and semi-state sectors (or cuts in social welfare rates) as being the first policy response. The first step should be a concerted assault on costs and inefficiencies in the sheltered sectors so as to increase disposable incomes across the board. Rebalancing and refrom of taxation comes next. Then it will be possible to see to what extent pay and wages are out of line with marginal productivity.

And, finally, I bristle when proposals are advanced for the state to comandeer private sector resources without due process or evidence-based justification.

Tom McDonnell said...

@ Rory
"supply side solutions have demand side consequences. So these consequences must be taken into account."


@ Paul
"And, finally, I bristle when proposals are advanced for the state to comandeer private sector resources without due process or evidence-based justification."

Unfortunately it is clear that due process and evidence-based decision making have apparently been somewhat absent from official policy for a long time.

For example, it is astonishing that the Government still doesn't systematically collect data on the cost of tax expenditures.

The new Government has made positive noises about data access and transparency. We need to ensure they take action in these areas. The only way to prevent vested interests from influencing the decision making process and causing inefficiencies is by ensuring full transparency and making a commitment to evidence-based policymaking.

The EU/IMF mentioned sheltered sectors on numerous occasions last week so you may be about to get the action you have been calling for.

Paul Hunt said...


Once again, I find we are in broad agreement - though I suspect we may not be ad idem on semi-state privatisation. But I'm totally behind your "The only way to prevent vested interests from influencing the decision making process and causing inefficiencies is by ensuring full transparency and making a commitment to evidence-based policymaking."

It appears that whatever will emerge on the 'sheltered sectors' will be revealed next month accompanied by an assault on price-gouging by some of the professional classes and some sort of 'jobs initiative' to protect Labour's flank.

It all smacks of 'business-as-usual' with policy formulated behind closed doors and presented as a fait accompli with no possibility to scrutinise or contest the evidence on which it is based (assuming there is some). Of course, we'll have some totally ineffectual 'debate' in the Dail (and in the media and on the blogs), but this won't change one iota of it as it'll be crafted to minimise rebellion on the Labour benches.

Surely it's time for those with an interest in evidence-based policy-making to coalesce, highlight this arrant nonsense and press for reform of Dail procedures to ensure some effective scrutiny. Something for the 'progressive-left' to get its teeth into and progress on a national level?

We have this "We the Citizens" initiative funded by Chuck Fenney, but I have my grave doubts about it.