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The lost decade of wages

Posted on June 02, 2016 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

Wages is not an easy topic to consider on the first day of the week which happens to be a public holiday and a mixed one weather wise at that in the Republic of Ireland. Wages form the biggest share of household income for most households. Following years of wage freezes or cuts the economy is in a strong recovery mode now. Yet, as pointed out in previous blogs on this site wage recovery is modest and uneven. Indeed, in some sectors and occupations wages are still falling as measured with reference to the most recently published average weekly earnings by the Central Statistics Office ( Earnings, Hours and Employment Costs Survey ).

Broad wage trends

Following four years of a gradual erosion in real average weekly earnings (from early 2010 to mid-2014) average wages have been on the rise since the summer of 2014. As Chart 1 shows, the pattern of recovery has been slow and hesitant. Only this year has the real value of weekly earnings been restored to the equivalent level of early 2008 before the recession set in. Of course, in the meantime other things have been happening including increases in taxes (both direct and indirect) as well as an erosion in the broad ‘social wage’ (that part of non-cash income to households in the form of publicly provided health services, education and other public goods). The year 2009 was an aberration to the extent that nominal wages (what people actually earned) were declining but real wages were rising because prices were falling (for the first time in 50 years).  Since 2009 price inflation has been remarkably low even though it does not seem so for a great many households struggling with rising costs of rented accommodation, motor insurance, education fees and public transport (as Government has cut back on subventions).

Sectoral wage trends

It would be highly misleading to lump all workers and sector together. While wages fell for most workers during the period 2009-2014 this was not the case in particular sectors including information and communications over the period 2011-2016 as my colleague Niamh Holton has pointed out in a recent NERI Research InBrief ( Trends in Wage Growth in the Republic of Ireland ).  Wages were still falling in the broad public sector in 2015 (reflecting composition changes as well as relatively modest pay restoration measures) while the private sector has seen some modest recovery.  Of course wage levels are significantly higher in the public sector reflecting in part such factors as average educational level of the workforce.

Occupational wage trends

There has been an intriguing divergence in wage performance among different groups of workers that has received hardly any public attention in recent years. From the more detailed breakdowns available on the CSO website (go to file EHQ13 under EHECS Quarterly data here ) it is possible to distinguish between three broad occupational groups as follows:

  • Managers, Professionals & Associated
  • Clerical, Sales and Service
  • Production, Transport, Craft and Other Manual

In the final quarter of 2015 average weekly earnings vary from €1,475 for managers and professionals in Industry to €443 for Production, Transport, Craft and Other Manual workers in the broad sectors of ‘Public Administration, Education and Health (NACE codes O, P and Q according to the CSO classification). Behind these averages is considerable variation. However, the most telling aspect of this breakdown is the pattern of change since early 2010 (the CSO only go back this far because of a change in definition and survey coverage at that point in time). For the economy as a whole (NACE B through to S which includes industry, services and public administration) managers/professionals saw  a rise of 15% over the period 2010 (second quarter) to 2015 (last quarter). That was equivalent to just over 2% on average each year – hardly a huge increase but an increase nonetheless. By contrast (Chart 2), manual workers showed a fall of 2.2% over the six year period (or very approximately 0.3% on average per annum).

These disparities were highlighted in a recent research publication of the UNITE trade union in Ireland ( The Truth about Irish Wages ). The report also highlighted how low wages in the Republic of Ireland are compared to other similar European countries and how low pay is a particular problem here in many sectors.

A point of significant comparison is the trend in estimated GDP (or if one prefers GNP) per capita since 2008. Chart 3 shows a significant divergence in trend according to this very crude but telling comparison. At first, wages absorbed a larger slice of declining total national income in the early period after the crash of 2008-2009. Very quickly profits recovered and overall income (whether measured by GDP or GNP) per capita has been moving ahead of real average weekly earnings. What has happened since about the end of 2013 is that non-labour incomes have shot ahead of wages as the economy has entered into a period of steady recovery. Real average wages are back to where they were in early 2008 (but living standards for most households overwhelming dependent on wages are hardly much better off compared to 2008). Many have drawn attention to a two-speed recovery since about 2013 between the western seaboard and the East of the State. Yet, there appears to be another two-speed recovery but the latter is receiving much less attention. Total employment is up as is the total wage bill as well as total population. This is very positive. However, the average wage level per worker or per household is not much different to what it was before the crash.

 

And why?

Many questions arise as to why wage recovery has been slow and uneven since 2014. Moreover, it appears that many sectors and some occupations saw little or no wage reductions even during the most difficult of periods for the labour market (2008-2012). The reasons for these trends and disparities are many and complex. It is likely that relatively younger, part-time and lower paid workers took the main hit by way of reduced hours, job losses or wage repression. The construction industry and related activities took its own hit. The wage recession in the public sector was a policy choice predicated on spending pressures and revenue collapse in the period 2008-2012.  Compositional or structural shifts in the workforce are likely to have played a significant role in moderating wage growth or even reducing average wages in some areas.

To date, there is no evidence of wage explosion. An enduring feature of the Irish labour market since the crash of 2008 has been a steady, modest and uneven recovery in wages coupled with a more significant recovery in employment and fall in unemployment/under-employment. Steady it goes seems to be the pattern but world events could change all that in the coming years.

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