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A worrying trend in wages

Posted on April 01, 2016 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

I bet you are perplexed by the title. Read on.  Since the 1980s wages have declined sharply as a proportion of total income in the Republic of Ireland. While total income or production (GDP, GNI or GVA as you wish) has grown dramatically since the early 1990s the share of wages in the total cake as declined. The Republic of Ireland is not unique by any means. In other major economies – notably the USA and the UK – the share of wages has declined over time. The reasons are many and complex (see a discussion of these by Paul Sweeney in a paper to the Statistical and Social Inquiry Society of Ireland in 2013 here). Among them is the regressive direction of public policy, the dismantling of labour protections and the rise of super profit sectors as well as the influence of globalisation, technology and financialisation.

Put another way, more profits are retained or re-invested or distributed to shareholders.  Many wage-earning households have accumulated assets and seen a rise in various forms of non-labour income. However, it remains the case that wages account for the bulk of household income for the majority of households, or, in the case of households comprising the retired income is derived from the state pension.  Among households wages account for approximately 60% of total personal gross income while state transfers (e.g. pensions or other welfare payments) account for 20% and ‘other incomes’ (rent, interest, dividends etc) account for the remaining 20%.  The share of wages in total national income (households and corporations combined) is well below 50% in the Republic of Ireland and has been on a downward trend since the 1970s.  There is something unique about the extent to which wages have declined in relative terms in the Republic of Ireland. In one word – the multinational sector.

The role of the multinationals

It is clear from an examination of national accounts data released by the Central Statistics Office that lurking behind the huge share of corporate profits in total income is the position of multinational companies and a few very large ones at that.  While a very significant part of the profits earned here by foreign based enterprises are ‘repatriated’ more of them remain in the State either as retained earnings or for reinvestment or for distribution. It would be no exaggeration to claim that there are, in reality, two economies in the Republic of Ireland:

  • a very high-productivity (at least as statistically measured), relatively low-labour intensive, highly export orientated and highly profitable economy on the one hand; and, on the other
  • a relatively low-productivity, high-labour intensive, domestically orientated and, in some cases, relatively less profitable economy.

Clearly, matters are not so black and white but this depiction captures some key differences relevant to any ‘single country’ analysis of trends in productivity, employment, exports or profits.  It is understandable that the CSO do not and cannot readily disentangle these two economies. The closest they come to it is in reporting aggregate statistics for ‘traditional’ industry and ‘modern’ industry. Included in the latter are pharma, ICT and similar sectors. It is evident that some 50 enterprises account for over 40% of total Gross Value Added (close to but a different measure to that of GDP) and over 60% of Gross Operating Surplus (close to but a slightly wider measure than corporate profits).  Although dated by now, see summary data in a presentation by the Director-General of the CSO in May 2014 here.

During The Great Recession of 2008-2011 the larger ‘modern’ enterprises saw no decline in output or production. This explains the relative stability and even growth in wages in firms and sectors associated with the ‘modern’ sector as measured by the CSO. The story in the ‘traditional’ sector is entirely different where job losses, wage cuts and recruitment freezes were the order of the day.  Outside the ‘traditional’ and ‘modern’ industrial sectors, the public service fell to the ravages of wage cuts, programme cuts and voluntary departures.  It should come as no surprise to anyone that the Republic of Ireland was enabled to recover quickly from about 2012 onwards due in no small part to the role of the ‘modern’ sector. The situation in other parts of the economy tended to reflect a rising tide in the modern sector (but not evenly or at the same pace by any means).

Productivity is key

This diversity in performance throws light on the very uneven recovery in wages across the entire economy.  Productivity is key to growth in wages and in living standards in the medium-term. Productivity, in turn, is related to skill levels, work organisation, investment as well as other factors (including, it must be pointed out, the distorting impact of multinational that manage the booking of their profits and activity as part of a tax avoidance strategy). But, what implications are there for profits and wages?  A squeeze on wages over the last 4 decades may have given rise to particular vulnerabilities in the way economic policy is conducted. Together with evidence of rising wage inequality (and not just gross income inequality) wage repression, as in the UK and the USA, may have induced a dependence by households on debt to maintain consumption at particular levels. Notwithstanding rising labour force participation by women in recent decades, wages have not been adequate to enable couples or individuals to cover the cost of living including accommodation without recourse to borrowing. Borrowing, as is well known, rose dramatically especially in the years before the crash of 2008. Of course, lax lending rules, huge inter-country capital flows and a low interest regime within the Eurozone added petrol to the fire.

There is a cyclical pattern to wage share as well as a long-term structural one. The two should not be confused.  During the early part of recession the share of ‘non-wages’ (corporate profits, ‘mixed income’, farming income and other income flows) tends to fall as a percentage of total economy income while the share of wages rises (even though wages may be falling in absolute terms). During a recovery such as we are witnessing today profits and other forms of income rebound rapidly while the share of wages falls. This can be seen now.  This is one part of the wider story about why people do not ‘feel a recovery’ or, as one Irish politician observed earlier this year ‘macro-economic statistics cut no ice with the people’. It would be just as accurate to say that micro-economic statistics cut no ice either with the people.

The recovery in wages (whether measured in hourly, weekly or annual terms) has been modest compared to the eye-watering leaps in GDP. Still, some of the increase in GDP is related to one-off or distorting factors such as a surge in investment under the heading of ‘intellectual property’.  The underlying growth momentum is probably closer to 3 or 4 % rather than 6 or 7% as measured in the last year. Average weekly wage earnings rose by 1.4%, only, in 2015.  In its latest Quarterly Economic Commentary (Spring 2016) the Economic and Social Research Institute report estimates of personal income showing:

  • 8.5% growth in total personal disposable income
  • 4.8% growth in non-agricultural wages (of which roughly half would have been due to growth in employment)
  •  30.3% growth in ‘other non-agricultural income’ of households.

(Source: Forecast Table A3 of the Spring 2016 QEC)

Alongside cyclical and short-term movements in wages and profits there are long-term patterns and structural shifts. In 2015 the Republic of Ireland recorded the lowest share of wages in total income (Chart 1) where I am using compensation per employee including employer and employee social insurance’ and adjusted for self-employed workers. Out of 41 countries reported in the AMECO database (including Japan and the USA) the Republic of Ireland has the third lowest wage share at 44% in 2015.  Only Mexico (35) and Turkey (33) had lower rates. No wonder that enterprises are so keen to locate in Ireland! It is a function of taxation, EU membership, skill levels, quality of life, political stability and also high corporate profitability (some of which has been deliberately managed via transfer pricing and other strategies). The EU average was 56% while the UK and US wage proportions were not much different at 57% in each case.

 

The trends in wage share since the 1960s are telling. Out of 37 countries for which data were available the fall in the Irish wage share over a 20-year period from 1995-2015 was the second highest of all. The wage share, over that period, fell from 55 to 44% of GDP. Only Romania showed a bigger fall. Over that period there were a few countries that bucked the trend with modest gains in the wage share. These included Sweden and Denmark.

Taking a very long time perspective over a half a century from the year 1960 to 2015 the wage share in the Republic of Ireland fell from 66% of GDP to 44%. By contrast, the share fell from 64 to 57% in the UK while in the USA it fell from 63 to 57%.  No wonder US Labor unions and politicians are uneasy about the corporate tax package offered by the Republic of Ireland as profits are ‘relocated’ to the Republic at the expense of the wage share in Ireland but with a loss to government revenues and employment in other jurisdictions (including developing economies).

In the case of the Republic of Ireland, the wage share remained fairly stable at over 60% for most of the period from 1960 to the early 1980s. The gradual downward slide was evident from the 80’s. The share dropped from 68% in 1980 to 58% in 1990 to 47% in 2000. The share remained fairly stable at around 47% until the recession of 2008-2009 when it temporarily rose to 53% before sliding down again. Focussing the period from the trough of 2009 to 2015, the Republic of Ireland  recorded the third biggest fall in wage share from 53 to 44%.  The recovery in economic activity has been particularly kind to some corporations and some households drawing their incomes from non-labour sources.

Somewhere around the mid-1990s the Irish wage share started to de-couple from that in the US, the UK and the EU (original 15 member states).  Up to 1995 wage shares in the Republic of Ireland, the UK, the US and the EU15 remained bunched together. (The estimated Northern Ireland wage share was 49.7% of GDP in Northern Ireland in 2012 or 57% of Gross Value Added which a more meaningful measure due to the exceptional role of product taxes and subsidies in the estimation of GDP. See NISRA report here).

The implications of falling relative wages

The implications of a falling wage share need to be considered.  While long-term structural shifts in economic activity and distribution of income may be difficult to reverse there is considerable policy scope at national level to regulate and negotiate those trends that impact on wage share. These include legislation on working hours and wage rates as well as institutional machinery for negotiated pay settlements in the private and public sectors. Management of corporate tax arrangements at international level is another area that needs policy leadership given the link, in the Irish case, between global tax avoidance and a particularly marked declining wage share here. A declining wage share may have missed the limelight in public debate. It happened gradually and steadily over a 20 year period as the Irish economy was transformed and increasingly polarised into ‘modern’ and ‘traditional’. We are left with an uneasy and precarious economic settlement heavily reliant on foreign inward investment along with heavy lifting by the exchequer to moderate income and wage inequalities in the market. At the same time expectations of wage increases and restoration of living standards are high and we are witnessing intense pressure in different areas of the labour market. We need to think through the larger evolving social settlement in time before the next economic slowdown or recession!

 

 

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