Capital Profits and Wage Share During the Celtic Tiger;

The ESRI’s publication ‘Recovery Scenarios for Ireland’ is a welcome contribution to a variety of quasi-predictions on Ireland’s future economic development. Central to all of these predictions is an emphasis upon increasing Ireland’s competitive position in the international market. To achieve this, there appears to be broad agreement on two key policy areas. Firstly, it cannot occur without solving the banking crisis. Secondly, it requires a reduction in labour costs. I will deal with these two points consecutively.

The ESRI argue that appropriate regulatory action could have reduced the dangers of the banking crisis. It was overly exposed to the property market. Thus, increased regulation needs to be introduced to enhance the reputation of Ireland’s financial system. This is true, but, what is more important, is to evaluate the incentive structure facing actors within banks. The incentive structure of making short term profits for shareholders at the expense of the wider economy is what led to reckless lending to property developers. Unless this incentive structure is changed it will be business as usual when the economy recovers.

Secondly, reducing labour costs appears to be the only fiscal tool available to policy-makers to increase cost competitiveness. Ireland cannot devalue its currency. Irish goods and services have become more expensive on the international market. This is true, and it needs to change. However, it cannot be blamed on ‘wages’. Recent research (Teague, 2009) has indicated that the rate of increase in wage share in Ireland over the past 10 years was far below the rate of productivity increases. Productivity increases far outstripped wage increases. Real wages were rising but unit labour costs were falling, i.e. capital profits increased relative to labour costs. Social partnership advanced the openness of Ireland economy by institutionalising wage moderation, not wage inflation. Hence, it was not labour that brought down our competitiveness but shareholder market driven behaviour to increase profit.

Too much growth, poor policy decisions, and an overheated economy led to our current recession. The wage share of the Irish economy has been declining rapidly since 2001. The profitability of the corporate sector has been increasing, yet it is the Irish workforce that are being asked to take the hit for reckless market behaviour. This is the political-economic reality of Ireland’s crisis, and ought to be acknowledged in the public policy discourse on how we get out of it.

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