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Keeping an eye on earnings and prices

Posted on February 21, 2014 by Micheál Collins

The past six years have been very challenging with a succession of harsh budgets, pay cuts, tax increases and price hikes faced by all households. For those impacted most, unemployment and emigration have hit home. For others, the challenge to make ends meet has grown harder and harder.

While the economy is perceived to be finally ‘turning the corner’, after many previous false dawns, the most recent NERI economic commentary (published just before Christmas) highlighted that things remains fragile. We anticipate that 2014 will see small but positive economic growth with further, and welcome, gains in employment. However, the backdrop of high national and personal debt levels, weak growth in much of Europe and continued high long-term unemployment remains a key concern. Furthermore, Government still plans an austerity budget in October. While it will be smaller than in previous years, the plan is still to take more out of the economy and further reduce public services (it is hard to see how without damaging front line services).

Given that outlook, it is worth reflecting on two points.

First, the ability of households to absorb further austerity measures differs dramatically across the income and earnings distribution – a reality that seems to be often mentioned but swiftly ignored when ‘reforms’ and ‘adjustments’ are being designed. The most recent Revenue Commissioners earnings data is telling. It details the distribution of tax cases (individuals or couples who are jointly assessed) by total gross income. Simplifying the data, we can roughly divide the Republic of Ireland’s annual earnings distribution into four quarters:

  • The bottom quarter of earners have incomes of less than €15,000
  • The next quarter have incomes of between €15,000 and €30,000
  • The next quarter have incomes of between €30,000 and €50,000
  • The top quarter of earners have incomes above €50,000

Within the top quarter 5% of tax cases have an income in excess of €100,000 and 1% have an income in excess of €200,000 (we provide full details in indicator 4.6a of the latest NERI Quarterly Economic Facts document). There may be room for further ‘adjustments’ at the top, but it is unlikely that those further down the earnings distribution can accommodate much more.

A second issue worth watching is the potential for indirect reductions in living standards for households as the economy recovers. For the past few years prices for most goods and services have been relatively flat. However, it is becoming a concern that prices increases are beginning to appear again. Affording these higher prices, many of them for hard to avoid or substitute goods and services, will add further pressure on lower income households. Without commensurate increases in wage rates, living standards will further fall further.

Unlike in the past, as a society we need to be more assertive and complaining about price increases – they are now a key threat to living standards.

Dr Micheál Collins is Senior Research Officer at the Nevin Economic Research Institute (NERI). See www.NERInstitute.net

The original version of this blog appeared as an article in the February 2014 edition of Shopfloor, published by Mandate. It is available here: http://www.mandate.ie/news/newsletters.aspx

Posted in: IncomeMacroeconomicsWages

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