Wages on the rise after 7 years of stagnation.
Posted on June 05, 2015 by Tom Healy
As data filter through every three months from the Central Statistics Office it is clear that wages are recovering slowly across most sectors of the economy. The adjustment of the labour market over a period of 7 to 8 years since the crash of 2008 is, and will be, the subject of research – did wages fall everywhere? Why did wages increase during the recession in many successful exporting firms? What impact did wages have on the length of the recession in domestic demand? How did wages compare to other trading countries? The picture is complicated because many factors impact on company performance as well as the level of domestic demand (the total of consumption, investment and government spending). Clearly, exports helped pull Ireland out of recession. Yet, the decline in wages was greatest in what economists call ‘non-trading’ sectors of the economy. The simplistic narrative runs like this: ‘we paid ourselves too much before the crash; we took the pain of previous transgressions; we pulled out because we took the hard decisions to reduce pay; and now we are example to everyone in Europe and beyond’. That narrative does not hold up to full critical scrutiny.
Chart 1 tracks the level of Average Weekly Earnings (seasonally adjusted) from the start of 2008 up to the first quarter of this year. It shows a gradual decline in wages from a high point of the final quarter of 2008 to reach a floor in the third quarter of last year. Since last Autumn average weekly earnings (AWE) have increased by 2.3% on average (or 4.6% on an annual basis if the quarterly rates of growth were sustained). Because prices – as measured by the CSO – have been falling since the middle of last year, this nominal increase in wages is the equivalent of 3.5% over the six month period from October 2014 to March 2015 suggesting an annualised rate of close to 7%. Care is needed in jumping to conclusions because quarterly statistical estimates are subject to revision as well as statistical quirks (as we have seen in relation to employment data in recent times). Also, the picture is more complicated once we start unpacking headline average figures to look at specific sectors and occupations.
Taking the last four years (from the first quarter of 2011 up to the first quarter of 2015) nominal AWE increased by 1.4% across the whole economy. However, most sectors recorded an increase over that four-year period ranging from 15.3% in the Information and Technology sector to 1.4 % in the administrative and support services sector. Only in two sectors out of 13 did AWE fall (namely Health and Education). In other words, while exports surged forward in the services area wages remained static or increased across most sectors of the economy during the four year period in question while in the public sector they continued to fall significantly. However, taking the 12 month period from Q1 of 2014 to Q1 of 2015 wages fell in nominal terms in the following sectors: Financial, insurance and real estate (FIRE), Professional, scientific and technical activities, Administrative and support services, Construction, Industry, Education, Accommodation and Food, Human Health and social work. At the same time there were average increases in the following sectors: Public administration and defence, Transportation and storage, Arts, entertainment, recreation and other service activities, and Information Technology. In the latter, average wages increased by 5.8% while in the FIRE sector they fell by 4.7% over the same period.
Over a four year period AWE rose by 3.9% across the private sector and 1.2% in the public sector (as measured by the CSO). Clearly, actual wage trends are not the same as contracted wage trends for reasons to do with workforce composition (e.g. retirement or hiring of above/below average workers), payment of increments where applicable and other factors. Bonuses also feature as an important component of pay in some sectors (e.g. FIRE and IT). A surprising result, perhaps, is that AWE grew by 4.9% over a four year period in small enterprises (under 50 employees) while AWE declined in medium-sized enterprises (with 50-250 employees) and increased by 1% in large enterprises. AWE is related to both hours worked and hourly rates of pay. In the private sector average weekly hours worked rose slightly from 30.9 to 31.1 over the four year period while in the public sector they rose from 30.9 to 32.1 reflecting structural changes as well as the specific terms of pay agreements. However, average hours worked fell for the economy as a whole from 2008 to 2011.
Behind these average figures are some telling trends in pay by broad occupation. Unfortunately, the CSO discontinued a time series showing AWE by broad occupation up to 2010 (Refer to Table A1 in the most recent CSO Earnings, Hours and Employment Cost Survey). The only available data related to 2012-2014. Over a three year period a pattern emerges: managers and professional employees saw pay increases while service, production and transport employees saw decreases (Chart 2)
Missing from time series data is a systematic and comprehensive record of wage inequality among employees over a long period of time (decades and not just a few years). In a previous blog I highlighted the evidence that wage inequality has grown in the republic of Ireland between 2002 and 2012. Data on wage inequality before 2002 appears to be absent. Just as important as the overall level of wages and real trends over time is the way wages are shared out across sectors, skill levels, occupations and sector. Hopefully we will see more comprehensive and timely information on these issues from here on. Public policy and wage bargaining should be informed by sufficiently detailed and timely information.