Labour costs: competing analysis, uncertainty and politicisation…..

How do we know if we are paying ourselves too much? This is a question I have been trying to answer since the ESRI published its report on public sector wages two weeks ago. I have also been inspired to find out detailed information about labour costs after last night’s Frontline programme on ‘public versus private sector’ pay, and unsurprisingly, this information is difficult to come by. But, if we do not have comparative evidence on wage costs and levels of collective bargaining coverage, then how can we make policy decisions on whether to cut pay or not?

The issue of whether (or in some peoples view, how) to cut wages is obviously causing a political storm. To some economists it is a mathematical question: Ireland is borrowing €400m a week to cover current public expenditure. One third of this goes on public sector pay. To reduce our level of borrowing we need to reduce our public sector labour costs. It is quite straight forward. This argument has been bolstered by the ESRI publication that claims public sector workers earn, on average, 22 per cent more than their equivalent counterparts (taking into consideration age, experience and education) in the private sector. This ‘22%’  fact has led to a policy cry from many that ‘cuts’ in public sector wages are ‘inevitable’.

But, of course, all of these claims are politically contested. Some would argue that the ESRI publication does not take into consideration the qualitative difference within and between public and private sector employment. It is simply far too simplistic to present a homogenous ‘public’ versus a homogenous ‘private’ sector. Others would argue that it takes the median for granted and does not take into consideration the substantial difference in pay between the CEO of a multinational and the contracted cleaner who scrubs the floor. The pay differential between companies and within sectors requires a qualitative nuance that statistical analyses cannot provide. Thus, there is a debate not just on the political issue of public sector wages but the method one uses to set the terms of reference in the first place. Others argue that the 22% has not taken into consideration the wage freezes in the public sector and the 7 per cent pension levy (which, amounts to a 7 per cent pay cut).The data is from 2006 not 2009.

Michael Taft over on ‘notes from the front’  also highlights the difference between cutting wages to increase employment and cutting wages to increase competitiveness. Both are different policy objectives and require different policy proposals. But, in broader political economy debates (and practically non-existent in Ireland) is why pay cuts are presented as the only option to increase competitive advantage? Ireland is in the European Monetary Union and it cannot devalue its currency. The UK has cuts costs via a depreciation in its currency, a policy tool not available to those in the EMU. The Growth and Stability Pact also maintains that all EMU members must keep their public deficit to 3 per cent. It must not borrow more than 3 per cent of its GDP. This wider ‘political’ monetarist context is lacking in the economic debate in Ireland.

Ireland, as a small open regional economy of the EU has to abide by fiscal-economic rules that are easier to manage for large states. Ireland cannot stimulate its economy and create internal demand via a stimulus package, whereas a large state (Germany) can. Furthermore, Ireland is at a further disadvantage given that our nearest neighbour, the UK, has devalued it currency, hence making it cheaper for business organisations (and consumers) to shop and source goods over there. Why would Tesco pay €3 for something when they can get it for €1 in the UK. All of these issues matter. But, given that we are in the midst of a referendum on Lisbon (which is being presented as an either you are in the EU or not) nobody wants to question the EMU or Growth and Stability pact for one of Europe’s regional economies. This debate needs to happen.

In terms of finding evidence on labour costs, I went to Eurostat. This graph shows the average labour costs per hour in the EU for 2008. As you can see, there is no data for Ireland (but data for every other country). This graph, however, shows the labour cost index (total cost on an hourly basis for how much it costs employers to employ employees) for 2000. It shows Ireland in the lower range (0.2-1.2) of percentage change. But, from what I can gather these do not contain public sector wages. I then went to EIRO, and had similar difficulty getting information about average labour costs. This report by the ‘Structure of Earnings Survey’ (2002) is a good indicator for where we are at. It is based on the National Employment Survey (2003), a survey that is legislatively required by the EU. Again, Ireland is about average, just below the Netherlands and the UK. But, the latest report (2008) is not available, as a lot of the information is confidential. This, again raises questions about survey information on such complex issues. It is well known that income for the top 1-2 per cent of society is extremely high, some say up tp 20 per cent of overall income. But, a survey will not capture this information.

But, this morning I went searching for more information (time-series) of this data on labour costs. The only thing I could find (and with great appreciation, received from the ESRI) was this excellent paper from 2008 that evaluates the impact of wage bargaining regimes on average labour costs. The paper concludes that centralised wage bargaining regimes ensures wage restraint, and private sector (non union) have not shadowed national wage agreements, but paid much more than the agreements. Thus, they conclude, that centralised national wage agreements in Ireland have added to cost competitiveness. But, what about the recent report that states the public sector are paid 22 per cent higher than the private sector? Undoubtedly, benchmarking was a key variable, and the higher renumeration body meant that since 2006, certain sections of the public sector have outstripped the private sector (given the flexible nature of their organisations, can reduce costs at a rapid pace and this not capture in 2006-8 survey data). But, at the same time, a IBEC survey has shown that most of the private sector have introduced wage freezes (akin to the public sector) and not wage cuts?

So, what is going on here? Are we paying ourselves too much? I have to humbly conclude; I do not know. The evidence, where available, is contradictory, the wider context to have a debate on wage costs (i.e. EMU and devaluation) absent and the politicisation of incomes policy (given that there are real people, with real livelihoods involved) widespread.  Undoubtedly, the private sector are shredding jobs, and SME’s, lacking the necessary credit to stay in business, undergoing serious strain.

But, it is necessary to keep in mid (and contrary to a lot of economic opinion) there are policy alternatives. Broad sweeping cuts that are not qualitatively nuanced will destroy the political legitimacy necessary to balance the public finances. The debate is better framed: some can afford to take a reduction in their wages, whilst some cannot. The public v’ private dichotomy is politically divisive and makes a rational debate impossible. Lots of studies (and highlighted in my sections above) indicate that most of the health and education budgets go on wages. Thus, we need to have an informed and open discussion about this.

But, rather than shed front line services (keep in mind the OECD concluded that the Irish public sector is relatively lean when compared to the rest of Europe)  maybe we need a rational debate about a) whether we should maintain the HSE? Perhaps it is too top-heavy, and requires a complete restructuring, b) whether we should introduce voluntary redundancies for senior teachers to allow younger (and cheaper) graduates to come up through the ranks, c) an open discussion about new progressive forms of taxation on both income and wealth, d) a renegotiation of the almost impossible target of reducing debt-GDP to 3 per cent by 2010. Extend this to 2015, and insist that Ireland, as a small regional open economy cannot abide by the strict fiscal rules of the growth and stability pact, e) a reduction in top public/civil servant wages to reflect our European neighbours, i.e. do not touch those on €20-45,000, but request those over €70,000 to reduce pay. This in turn would reduce wage/income inequality.

But, at the end of the day, evidence is sparse, scattered and open to interpretation, illustrating the complexity of both the policy process, and concrete basis for making hard rational decisions.

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