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Wage repression – the new orthodoxy

Posted on September 05, 2014 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

 Wages have been falling since 2009 in the Republic of Ireland. This deterioration has been accompanied by (i) an erosion in purchasing power as the prices of most goods and services rise and (ii) less money in people’s pockets as taxes and public charges have risen and many social payments have been cut (or have not kept pace with inflation). The surprising story – perhaps – is that the fall in wages has continued into 2014 even though employment and output have been picking up since at least 2013.

Wage moderation, if not wage cuts, is seen by some economists, politicians and business spokespersons as essential for maintaining competitiveness, containing costs and boosting employment especially in a small open economy or economic region such as in Ireland. This is one side of the equation only. The other is the demand for goods and services in the local economy which is highly dependent on how much money consumers have in their pockets. Wages still account for just under one half of total income in the economy. It accounts for the bulk of household income and is related to most of personal consumption expenditure which is the main prop of domestic demand.  As well, there is broad agreement with the principle that wages should be a level appropriate to the norms, expectations and living requirements of a given society at a given point in time. The idea of a living wage is culturally and time specific as well as evidence based. See here .

So, what has been happening to wages? A previous Blog looked at the case of the UK/Northern Ireland . This week I look at some recent data for movement in wages in the Republic of Ireland using the results of the most recent Central Statistics Office Earnings, Hours and Employment costs (EHECS) as well as international comparative data published last week in Employment Outlook by the Organisation for Economic Cooperation and Development (OECD) . The story seems not dissimilar to that of the UK. Incomplete at times, dated and always subject to measurement challenges what the statistical evidence suggests is the following four points:

1              Wages are still falling

Average weekly earnings (before adjustment for price changes) have been trending downwards since the end of 2008. When inflation is taken into account and because prices fell, on average, in 2009 (Chart 1) the real value of earnings rose initially after the shock of 2008/09 even though the nominal amounts were trending downwards.  However, the pattern since about the end of 2009 is clear – average real wages have been falling. These numbers apply to the average for all employees in all branches of the economy (some sectors such as information and communications sector have seen increases in average real earnings).

 

2              Wages have fallen for industrial and service workers more than manager employees

Over the last 4 years manager employees have seen some increase in average earnings. This is equivalent to a real increase of 4.9% between the middle of 2010 and the beginning of 2014 (comparable time series data linking before and after 2010 for these broad occupational groups are not available). While this is not a huge increase and it has probably been more than cancelled out by increases in taxes and charges the situation for other employees is different. Industrial workers lost 11.2% in real terms since 2010 while clerical/service workers lost 4.4%. While the overall drop in living standards may not be much different as between these three broad occupational categories of employees due to the impact of progressive income tax changes especially in the 2010 budget it is clear that, on average, intermediate and manual occupations have lost the most in terms of gross wages.  Some of this will be due to changes in the structure of employment and the shakeout in retail and construction especially in the earlier part of the period in question.

  3              Low pay is still widespread and possibly growing

A previous blog explored the incidence and distribution of low pay . This shows a high concentration of low pay in sectors such as hotels, catering and retail. In total there were an estimated 320,000 workers in 2009 below the ‘Eurostat threshold’ for low pay which is two thirds of median earnings.

4              And wages are falling in Ireland while they are rising elsewhere

Wages as measured by annual average real earnings fell by 3.3% in 2013 – the second highest in the OECD group of countries (Chart 4). Source: OECD Employment Outlook .

* Republic of Ireland

5              Republic of Ireland home to low pay

Recent international data published by the OECD shows that the incidence of low pay in Ireland (% of workers at or below two thirds of median earnings) was among the highest in OECD countries and has increased since 2003 (Chart 5).

The OECD has warned in its most recent Outlook that:

Further downward adjustments in wages in the hardest-hit countries risk being counterproductive: especially in a context of near-zero inflation, it may be difficult to achieve in the first place; or it may do little to create jobs while increasing the risk of poverty and depressing aggregate demand. Other policy measures are required.

The editorial of Employment Outlook goes on to say that

Policies such as minimum wages, progressive taxation and in-work benefits can help to share more fairly the costs of economic adjustment.

* Republic of Ireland. Data refer to 2003 (yellow bar) and 2012 (green bar).

 Behind the trends the obvious question is - Why?  This is proving more difficult than normal because we are not living through normal times:

  • Real wages are down
  • Employment is up
  • Price inflation is down
  • Personal consumption is up
  • And personal and public debt is as high as it has been in many decades.

It’s a strange recession and an even stranger recovery still. It is possible that those who spoke loosely about ‘new economy’ at the turn of the millennium were right after all.  It is in the absence of any discernible productivity growth in many of the recovering economies.  

As stated by the OECD last week, countries need to invest in human capital and create the conditions for quality jobs and not just jobs welcome as that is. A single pony approach under the heading of monetary policy is not an adequate response to the European job crisis of which Ireland continues to be afflcted. Creating jobs, boosting aggregate demand and improving the supply of skilled labour is key.  A European wage-led recovery is needed along with other measures.

Posted in: Wages

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