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The Wages Elephant is in the Domestic Parlour

Posted on December 12, 2014 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

Flat lining of GDP, water charges in the Republic, off and on balance sheets, Stormont talks stalling, tax cuts, USC, corporate taxes, double-Irish, knowledge boxes, regressive budgets, more tax cuts and Christmas is approaching fast. What’s missing from public discourse? You would never guess – wages. Yet, it is critical to economic recovery and medium-term social development. This Blog reviews the overall trends from the latest data on wages in both parts of Ireland. 

Wages falling in nominal and real terms in the Republic of Ireland

The latest data, for the Republic, come from the Central Statistics Office (Earnings, Hours and Employment Costs Survey) – EHECS – and show a fall in average weekly earnings (down by 7.8% between the final quarter of 2008 and the third quarter of 2014). However, when price inflation (as measured by the consumer price index) is factored in, the real value of average weekly earnings is down by 11.5% from its real peak in the 4th quarter of 2009 to the third quarter of 2014. 

Chart 1 shows a downward sloping line for real average weekly earnings over the last 4 years (with two bumps on the way). Surprisingly, perhaps, the real wages have fallen again in the third quarter of 2014 (estimates for this quarter are provisional). One possibility is that workers who stay in employment are seeing modest increases in wages but new entrants to the workforce are starting on much lower wages and this is dragging down the overall average for wages.  It is not possible to ascertain this from either data source but there is some tentative evidence that this is the case in the UK.  Set against a backdrop of rising employment in both the UK and the Republic of Ireland it appears that lower paid workers (usually young or part-time) are gradually replacing older or better paid workers. At the other end of the age-spectrum there is some evidence that older workers are staying on in employment (sometimes as self-employed) and this is helping to increase overall employment totals (but not average wages).

Chart 1

 

Source: CSO EHECS CPI

 And wages are also falling in real terms in Northern Ireland

In Northern Ireland a pattern of declining real wages is also apparent from the latest UK Annual Survey of Hours and Earnings (Chart 2). It shows a decline of roughly 13.3% in real average (median) weekly earnings in Northern Ireland. Price inflation has been more significant in the UK compared to the Republic and this has more than eroded any small gains in nominal wages. As in the Republic, there is considerable variation within the overall average trends. Part-time and female workers in Northern Ireland have taken the biggest reductions in average weekly earnings. While women workers have fared better than male workers in terms of average pay trends since 2009, it is clear that manager employee workers saw higher nominal wage growth than other occupations (this may also signal compositional effects).

 Chart 2

 

Source: ASHE/DETI Table 1

 With marked differences apparent between broad occupational groups

Looking in more detail at trends in real earnings in the Republic of Ireland, it is worth noting that broad types of employees have experienced differences with managers and professionals faring relatively better than production, clerical, retail, service and manual workers. On the face of it, the recent recession looks like a ‘blue collar’ recession. Add to this other considerations such as age, gender, household composition, ethnic background and social class and it is likely that the recession has hit particular parts of the labour market more severely than others.

Chart 3

 

Source: CSO EHECS

 Declining wages is running in parallel with reductions in household income

Of course, an average fall of 11.5% in average weekly earnings in the Republic of Ireland is not the equivalent of a fall in disposable household income. The latter includes other forms of income; typically contains more than one individual; and is affected by taxes and social transfers to households (e.g. child benefit).

The latest NERI Quarterly Economic Facts (indicator 4.3a) indicates, for the Republic, a nominal fall of 18% (or 17% in real terms) in average (median) disposable household income between 2008 and 2012.  A further fall between 2012 and 2014 is likely pointing towards a real cut of over 20%.  The overall picture that begins to emerge is a fall of around 10% in real average wages from a peak in 2009 and a much bigger fall of over 20% in ‘living standards’ as measured by average (median) disposable household income from 2008 to 2014.  The fall in household income is related to falling wages, higher taxes and lower social payments (not to mention restricted social services). Trends in real wages and in household income are related to domestic consumption, however imperfectly.

In the case of Northern Ireland, my estimate is of a 7% real average reduction in median household disposable income between 2009 (the peak year) and 2013. An inflation rate of 14% cancelled out a nominal increase of 7%. These trends are likely to have continued into 2014 pointing towards a real cut of around 10%. Northern Ireland households have taken a less severe hit than households in the Republic over the course of the recent recession but the baseline is lower in the North (by a factor of very approximately a third when currency is taken into account).

The causes of falling wages are complex

A slump in aggregate demand - especially domestic demand - has put downward pressure on wages through reduced demand for workers. Continuing fiscal austerity has also taken its toll directly in the case of public service employment and wages as well as indirectly through falling demand in the economy. Changes in working hours, compositional changes in the workforce and other factors are part of the explanation for these wage trends. Long-term trends in technology, trade and declining union bargaining power have also impacted on the wage share in advanced economies. The main point, for now, is that real wages have declined by over 10% since 2009 and the pattern has continued into the second half of this year in both parts of Ireland. While a direct link from declining real wages to stagnant personal consumption expenditure cannot be made it is clear that the two are not unrelated. It is difficult to kick start the domestic economy without real wage growth.

The social and macro-economic implications of falling wages are significant

Rising employment levels are welcome anywhere. However, the quality and remuneration of work is a matter of concern especially as domestic demand including consumption is sluggish.

Frequently wages are looked at as primarily a micro-level cost for businesses and something to be reduced especially in recessions. However, a balanced view must take account of the impact of wages on demand in the macro-economy. What are the principle concerns flowing from a decline in real wages?

  • Earnings from employment make up most of household income in both the UK and the Republic of Ireland.
  • Wage income is a major determinant of personal consumption expenditure (which in turn drives much of domestic demand even in small open economies and regions).
  • Wage inequality whether by age, sex, occupation or sector is a source of wider social inequality and may, if not redressed, undermine in the long-term various social goods such as health, community well-being and social cohesion.
  • Poverty in work is a major and growing problem as a greater number of households fall below a living income because of lack of access to a living wage in the case of those at work.

Why we need to focus on social wages and not just individual wages

However, the wages paid to employees is not the only source of income and consumption in households. ‘Social wages’ in the form of public goods and services paid for out of general taxation or social insurance contributions by employees and employers is a vital component of livings standards and quality of life.

And if the topic of wages gets little airing in public discourse, the topic of 'social wage' gets scarcely any mention whatsoever. Taxes on income from labour (whether below, at or above the average) will be reduced at a terrible cost to workers, families and communities in money not spent on care of the elderly, the young, the sick and those in need. Moreover, the social wage of income protection when sick for a few weeks which is taken for granted in many other European countries is under threat from tax cuts already made and more mooted. The social insurance component of total personal income tax, in Ireland, is woefully inadequate and way out of line in Europe.

And an auction on cutting taxes is damaging and socially regressive

Perhaps there is a unique opportunity to convert the very progressive (it could be made even more progressive) and relief-free Universal Social Charge into a proper pay-related social payment in a reformed PRSI system? I will return to the topic of the 'social wage' in a future Monday Blog.

 

Posted in: Wages

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