Tuesday, 31 May 2011

Wage-setting mechanisms: statement by 36 economists, analysts and social scientists

“We broadly welcome the Report of the Independent Review of Employment Regulation Orders and Registered Employment Agreement Wage-Setting Mechanisms. In particular, the recommendation that the basic JLC framework should be retained is good news for many thousands of low-paid workers. We also endorse the conclusion reached by Kevin Duffy and Frank Walsh that reducing JLC rates to the minimum wage level would have important distributional consequences without having any substantial effect on employment.

“We are concerned that recent proposals reportedly made by Enterprise Minister Richard Bruton are not in line with the Duffy-Walsh report [...]"

Click here to read the rest of the statement issued today by 36 economists, economic analysts and social scientists, all members of the TASC Economists' Network.


Paul Hunt said...

This intervention by the 'great and the good' on the 'intellectual wing' of the 'progressive-left' inadvertently raises the two crucial issues about political governance and economic policy that nobody, but nobody, wants to address.

First, on the process of public policy formulation, enactment and implementation. A new policy - or the revision of an existing policy - is required. The Minister, his/her advisers and senior department officials have a pretty good idea of what they want to implement, but need some time and space to do a bit of sounding out with various interested parties behind the scenes. A report is commissioned from some 'independent' parties and delivered to provide some intellectual cover. The Minister, advisers and officials go into a huddle and produce what they think might fly - irrespective of what was in the 'independent' report. (If it supports their position, fine; if it doesn't, so what?).

Some wriggle room will be built in to the proposals to allow for a few minor amendments depending on the amount and type of flak the proposals provoke. The possibility of a U-turn will not, absolutely not, be contemplated. Any modifications conceded will be spun as major concessions to public opinion by a 'listening government'. If the proposals provoke the expected response from the 'usual suspects' - and this intervention fits the bill perfectly - the government's resolve will be strengthened. The slightly modified proposals will be whipped through the Oireachtas in legislative form. Job done.

Until ministers and their advisers and officials are required to present and defend their proposals against rigorous, robust and adversarial scrutiny by those with knowledge, competence and experience before appropriately empowered and resourced Oireachtas Cttees, this nonsense will continue. Backbench TDs (of all factions and none) have the power to enforce this simple change in procedure that would greatly restrain the excessive executive dominance of government in the public interest - and expose the role of those who exercise power and influence behind the scenes. But nobody wants to know. It seems to be much better fun mithering about An Seanad, the Presidency, electoral reform, quotas for female election candidates, etc. Anything to avoid restraining the dominance of the executive - and the permanent government (and those who exercise power and influence) behind it.

Perhaps those who should be pushing for this reform feel they are able to influence things behind the scenes under the current arrangements and don't want them changed?

Secondly, on economic policy, this intervention quite correctly highlights the higher marginal propensity to consume of those on lower incomes. But it totally ignores the fact that the monetary value of consumption is equal to the volume of consumption multiplied by the price level of consumption. The economic well-being of those on lower pay may be sustained either by maintaining pay levels (as advanced by this intervention) or, if pay levels are reduced (as the Government seems intent to do), by reducing the price level of consumption by an amount that leaves the economic well-being of those on lower pay unchanged in real terms.

It is incontrovertible that the price level of consumption is far higher in Ireland than it is in most EU member-states and reducing it would have economy-wide benefits, but, again, nobody (apart from the IMF) seems to have any interest in this. Perhaps those who should be addressing this on behalf of the lower-paid have special interests to defend?

The hypocrisy of the 'progressive-left' is becoming rank and voters are turning away in their droves throughout the EU. Some honesty is required to win them back; the Neocons haven't gone away and right-wing, populist, nationalistic, xenophobic parties are on the rise.

Rory O'Farrell said...

@ Paul

Just referring to economic policy.

In the hospitality sector wages account for less than 25% of output. Less in the retail/wholesale sector (NACE1, G). So even if 100% of the wage cut was passed on to consumers (which I don't believe) a 1% wage cut means less than a 0.25% price cut.

So cutting the pay of the low paid will hurt them more than it will benefit the users of restaurants.

Its transferring income, with leaky buckets, from the bottom to the top.

Everything would be fine and dandy if overall prices for the whole economy came down at the same time. However the govt has control over wages (in the public sector and the low paid), but has no instruments to simultaneously reduce prices.

A wage-led price deflation is just sucking demand from the economy. Improving competitiveness by reducing rents would not be nearly so damaging.

So far the public sector has largely suffered from hourly wage cuts, and the private sector for reduced hours/employment. Are we to increase competitiveness by making the lowest paid suffer both?

Paul Hunt said...


I expected this sort of nit-picking and the encouragement to shed 'crocodile tears' for the lower-paid - primarily as a means of avoiding the thrust of the principal contentions I am making, but "..govt... has no instruments to simultaneously reduce prices."?

Perhaps not precisely 'simultaneously', but the government has no shortage of instruments that may be applied directly and indirectly both to reduce the costs that have driven prices to their current excessive levels and to enforce, again directly and indirectly,subsequent price reductions.

But perhaps such vigorous action by government might damage rent capture by cossetted insiders whom the so-called 'progressive-left' is determined to protect?

Tom McDonnell said...

@ Paul

Rank hypocrisy? Crocodile tears? I believe your statements are unfair and ungrounded.

Are you saying you dont believe the sincerity of those who are voicing their opposition to the (reported) policy of the Government to reduce the incomes of low paid workers. The TASC submission to the Independent Review (http://www.tascnet.ie/upload/file/TASC%20Submission%20on%20ERO%20and%20REA%20wage%20setting%20mechanisms.pdf) sets out the economic position and the TASC position on income inequality and social justice has been articulated in a plethora of documents.

I have also regularly argued for the need to reduce other costs in the economy (such as here: http://www.tascnet.ie/upload/file/WageComp140411.pdf).

What am I missing?

Rory O'Farrell said...

@ Paul

This is not nit-picking. The post is specifically about JLCs/REAs. That is the lowest paid.

There are two ways to reduce prices in the economy:1) decrease demand, 2)or increase efficiency (supply).

A wage led deflation would reduce prices. Partly due to lower costs, but more importantly due to the collapse of demand (what we are witnessing now).

The alternative is to improve efficiency and reduce non-wage costs. (Ie remove upward only rent reviews, invest in infrastructure etc etc).

As the aim is to increase employment, decreasing prices by reducing demand is self defeating. (And the lower down the income distribution the more negative the effects).

Price levels are a monetary policy issue, and competitiveness is a question for competition policy. Wage rates are not an appropriate instrument to be used for competition policy or monetary policy.

Anyway, as the TASC report shows (using Eurostat data) hourly wage rates for those covered by JLCs are in no way excessive when compared to the EU-15.

Paul Hunt said...


Paul Volcker, former US Fed chairman, recently described economics in a manner to which I subscribe: "“Economics is fundamentally about efficiently allocating resources so as to maximize the welfare of individuals”. I would add 'both individually and collectively'. And the converse is equally valid. Any inefficiency anywhere will damage the welfare of individuals.

And, since you seem to be missing something, perhaps you might read my initial comment again. Inefficiencies, deadweight costs and rent capture are endemic in the state, semi-state and private sheltered sectors. The time for selective targetting of these and posturing in response to what are, effectively, done deals has long gone.

But perhaps seeking to maintain the fiction that it hasn't sustains a nice, warm and fuzzy feeling.

Michael Burke said...


"Its transferring income, with leaky buckets, from the bottom to the top."