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The Irish economic model assessed (#1)

Posted on February 10, 2017 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

On this site I have made references on many occasions to the unique ‘Irish economic model’. By ‘Irish economic model’ I mean those features of an economic and social model that place the Republic of Ireland in a somewhat unique place internationally. In this week’s Monday Blog, I focus on some labour market aspects of the ‘Irish model’.  The wonderful advantage of being part of the European statistical system is that we have more data than ever on various aspects of labour markets from patterns of employment participation to earnings and conditions of service.  This information needs to be set in context because labour market earnings do not equal labour costs (or ‘compensation’ to use a better expression) and labour compensation does not equal ‘living standards’ of workers.  Taking a quick look through earnings, compensation and living standards of workers can tell us a lot about the ‘Irish model’.

Earnings from labour

The Republic of Ireland is a high wage economy. True.

Chart 1 shows data on average (median) gross hourly earnings of workers in the ‘Business Economy’ (those sectors more likely to be trading in goods and services internationally) in 2014. Workers in the Republic of Ireland are fourth from the top and ahead of the EU28 average as well as the Eurozone average and, of course, ahead of their UK (and Northern Ireland) counterparts. All of these figures have been adjusted for PPS – purchasing power standard – so as to reflect differences in prices or in what a given wage will purchase by way of goods and services. So, the ‘average’ Irish worker in the business economy can holiday in Clacton-on-Sea and tell her‘average’ English counterpart that she is almost 30% better off than her (€15.2 per hour compared to €11.8 per hour in the UK).  Roll over UK! But hold on.....

‘Social wage’

Wages are high on average in Ireland even when adjusted for price differences. Our Irish visitor to Clacton-on-Sea fell and broke a limb and had not bothered taking out travel insurance and so ended up having to go to the local hospital A&E along with her partner and 13 year old son. There was no mention of a charge of €100. Luckily the Irish tourist has a European Health card and the UK is still in the EU for the moment.

The point is that ‘living standards’ as a concept and statistical measure is a lot more complicated than income or wages as part of income. ‘Living standards’ is about all those goods and services to which people have access by virtue of their own income or wages and those goods and services provided collectively by society. These ‘public goods and services’ include education, health and many other collective goods. How we do we compare countries on some broad measure of ‘living standards’? Possibly the best measure is a little known and rarely used statistic ‘Actual Individual Consumption’ (AIC). The very term is misleading at first because it seems to have little to do with the notion of all goods and services including publicly provided and paid for goods and services ‘consumed’ by individuals.

Formally, ‘actual individual consumption’ is defined by Eurostat in the following way:

Actual individual consumption, abbreviated as AIC, refers to all goods and services actually consumed by households. It encompasses consumer goods and services purchased directly by households, as well as services provided by non-profit institutions and the government for individual consumption (e.g., health and education services). In international comparisons, the term is usually preferred over the narrower concept of household consumption, because the latter is influenced by the extent to which non-profit institutions and general government act as service providers.

Eurostat goes on to making the following telling point:

Although GDP per capita is an important and widely used indicator of countries’ level of economic welfare, consumption per capita may be more useful for comparing the relative welfare of consumers across various countries. AIC per capita is usually highly correlated with GDP per capita, because AIC is, in practice, by far the biggest expenditure component of GDP.

More formally, again, the OECD define AIC in the following way:

Household actual final consumption) is the sum of the total value of household final consumption expenditure, non-profit institutions serving households (NPISHs) final consumption expenditure and government expenditure on individual consumption goods and services.

Except of course where the Republic of Ireland is concerned. Chart 2 shows AIC per capita along with GDP per capita. The unique ‘Irish model’ stands out.  Though high on GDP per capita (I deliberately used 2014 rather than 2015 due to the severe additional statistical distortion contained within GDP in the latter year), Ireland is middling in terms of ‘living standards’ as measured by AIC.  Coming back to our Irish tourist in Clacton-on-Sea matters are not as they initially seemed. Put another way, the high cost of accommodation, transport, education, health and other ‘out-of-pocket’ expenses means that Irish wages do not go as far as wages in our nearest neighbour – a country already characterised by relatively low wages and deteriorating public services.

Labour compensation

But, if we were to look at the matter from the point of view of costs facing employers and prospective investors we need to look at ‘labour costs’ including payroll taxes (PRSI or National Insurance Contribution in the case of the UK), employer pension contributions plus other employee costs covered by the employer such as insurance and subsidised services.  Here, the data show a markedly different picture not least because of very big differences in the rate of employer social insurance.

What do we know about the Irish model in so far as wages and living standards are concerned? We are paid well on average but we get a mediocre standard of living. Part of the reason for this is the limited amount of ‘social wage’ by way of public services. Implicitly we opted for fantastically high productivity levels in the footloose internationally mobile multinational sector helping to prop up a less than spectacular native economy coupled with relatively modest taxes on employers and relatively poor public goods. The other characteristic of the Irish model is the prevalence of gross wage inequality partially neutralised by high cash social transfers rather than public services. I will return to this topic in a later blog.

(for a more detailed account of the above issues see the most recent NERI Research InBrief by my colleague Ciarán Nugent here )

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