Why IBECs strategy of cutting wages will contribute nothing to an innovative economy

If IBEC are so concerned about employment they should propose cost adjustment strategies such as a reduction in working time and increased labour productivity over wage cuts. The strategy of wage cuts and labour market flexibility will contribute nothing to developing a successful export economy. IBECs strategy has more in common with what is happening in central and Eastern Europe than Western, Alpine or Northern Europe. In low cost economies with poor export performance comparative advantage is sought on its ability to be cheap. But, as Craig Barrett, the chief executive of Intel recently stated ‘it does not pay to be cheap’ in the high tech export sector. Thus, if Ireland is serious about developing into an industrial innovative economy then it has to move away from a narrow focus on wage costs and labour market flexibility as a strategy of cost adjustment.  Successful small open European economies do not focus on cutting wages or labour standards to compete in global markets. They focus on strategies that increase the productivity of labour. To adjust costs they either reduce working time or introduce flexible working arrangements. Not only are these strategies more effective in maintaining and generating employment they produce an innovation function that leads to high quality production. It leads to export performance. This article will show why Irish capitalists are wrong about their own system.

As it stands Ireland has an industrial base that is more akin to Eastern Europe than Western Europe. With the exception of the US Multinational Island that exists within our economy the industrial base is non-existent. This was documented as far back as 1992 when Lars Mjoset identified two key factors behind Ireland’s weak industrial development; emigration and the absence of a national system of innovation. Both of these contributed to Ireland’s lack of industrial development in mutually supportive ways. Mass emigration led to the export of human capital which in turn reduced the productive capacity of labour thus precluding a national system of innovation to emerge (as occurred across Western Europe). Ireland, he argues, experienced growth without development. Output increased – measured in GDP – but the factors for a sustainable strategy of socio-economic development were never instituionalised. The history of emigration is a core demographic factor that no other economy in Europe has experienced. It meant Ireland never developed sufficient internal domestic demand to sustain an industrialisation process. The crux of Ireland’s developmental problems is the weak development of indigenous industry. Irelands challenge was less to open itself to global markets but to mobilise its productive resources.  In an environment where other countries had established a variety of industrial sectors (think engineering and car manufacturing in Germany) this was certainly a challenge. But, with huge capital reserves available on finance markets, a highly educated workforce, a coordinated system of wage restraint and the import of successful firms in the economy (think Intel) the capacity to do so was available. In fact, the absence of a tradition of Fordist modes of production should have been a comparative advantage for Irish business.

Since 1992 Ireland experience significant economic growth in two different periods. The 1990’s was premised on foreign direct investment and the second a construction boom fuelled by cheap credit in the domestic economy. Neither tackled the core problem of developing a national system of innovation. Ireland attempted to import a system of innovation from US, British and Germany with few or no linkages to local industry. This can be observed from the persistent employment crisis in the economy. Even during the Celtic Tiger years (1992-2000) Ireland maintained relatively high levels of unemployment. It was only with the explosion of cheap credit and an increase in wages to recoup gains from the Celtic Tiger after 2000 that Ireland sustained full employment. But, this was not used productively by Irish business. By 2006, almost one in five people were either directly or indirectly employed in construction. With lots of money being spent in the local economy the knock on effect was more bars, restaurants, retail and personal services. All of this masked an underlying developmental problem in the industrial sphere. Even at its peak the successful export sector, generally associated with US multinationals, employed less than 170,000 people of the workforce. The Health Service Executive employs around 100,000 people. In this regard, the business community have never got to grips or developed the necessary investment to utilise productive labour. Irish business interests were more focused on defending the interests of banks and the financial sector or blaming the state than embedding a national system of innovation. Nothing was learnt from the successful export economies across the coordinated market economies in Alpine, Nordic and Western Europe.

If IBEC understood the history of industrial Europe it would quickly realise that Sweden, Germany, Netherlands and Finland are highly successful export economies because of their focus on productivity and innovation. The export sectors in these economic systems tend to be high wage and high skilled. They also operate in a context where the labour market is regulated to such an extent that it is difficult to hire and fire easily. Some argue this has a created a labour market with ‘insiders’ and ‘outsiders’ but this ignores the core productive capacity that regulation and secure labour markets enable. Secure labour markets force firms and sectors to reorganise production on a continuous basis to generate more value added per unit of labour. It forces innovation. Rather than focus on a Ryanair low cost model it generates a virtuous circle of productive investment in productive labour. Central to this is wage restraint. Industrial unions such as IG Metall in Germany recognise that wage restraint is necessary to ensure a profitable return to capital. But, the trade off is that investment is used productively in the long term interest of labour and full employment. They compete with other capitalists on quality and production not on cost. This facilitates a network of employer and producer groups that are relatively well organised and structured in the interest of the productive economy rather than the narrow sectional interests of finance, fast food or hoteliers (as happens in Ireland). Thus, employers in the most successful export economies of Europe are reluctant to dismantle labour market institutions that provide them with comparative advantage in export markets. An organised labor market incentivises employers to use capital productively, focus on long term growth, raise skills levels and compete on the basis of human resources not cost.

Given the liberal market orientation of Irish capitalism employers are incentivised to bring down labour costs rather than invest in new technologies, long term growth, production or highly skilled labour. This is why IBEC, ISME, SFA, Chambers Ireland and a variety of sectional interests want to cut the minimum wage, the REAs and the EROs. They are focused on short term measures in the domestic economy and don’t know any other strategy. Similar to neo-classical economists they know very little about the real operation of markets as institutions. They assume that by cutting the minimum wage, registered employment agreements (REAs) and employment registered order (EROs) that Irish business will somehow start investing their surplus profit in more labour and create more jobs. There is no absolutely evidence to support this. There is no national system of innovation to use capital productively which by its very design requires a long term perspective. It creates employment more slowly but it generates industrial sectors that are sustainable and competitive in the long run with highly paid workers with high quality skills. This in turn requires a government willing to support labour mobility through training and unemployment benefits to secure flexibility. Thus, whilst German, Dutch, Finish and Austrian employers focus on strategies to innovate for export markets Irish employer bodies are more concerned about making sure Supermacs’ don’t pay the minimum wage. They are more concerned with the discourse and policy of low wage labour. Only US MNCs, arguably, are interested in the long term strategies of innovation but given the absence of coordinated economic planning in Ireland these have never been successfully linked to local markets. The knock on effect is more Centras in the local town for lunch sandwiches.  Hence, you are not likely to hear Matt Brittin talking about cutting the minimum wage to be innovative. All of this is a serious indictment of Irish business associations and their capacity to generate a successful full employment economy through national innovation. Enterprise is simply too important to be left to Irish business.

2 responses to “Why IBECs strategy of cutting wages will contribute nothing to an innovative economy

  1. Just found this blog; an interesting and extremely informative post (as was your recent post on the Irish Left Review).

    One question that has always fascinated me about the comparative performance of Northern and Western European economies and Ireland is whether there might have been a strong causal role of a strong left in the economic performance of the former. My hypothesis being that it was the presence of strong social democratic/socialist/communist movements in Germany, France, Sweden, Italy etc, which forced capitalists in these countries to really think long term and strategically because they were hemmed in by Left movements that could cripple them if they tried to increase competitiveness through pushing wages and transfers downwards. Moreover, all of these societies had/have a vibrant ideological divide where Right wing analyses really had to be robust because, if they weren’t, there was an equally plausible and widely available Left analysis for people to engage with.

    Here, alas, none of that pertains and we’re left with a business class that apparently really believes that reducing workers’ status, earning and life chances to the bare minimum will actually provide sustainable economic progress.

  2. That is very attention-grabbing, You’re a very skilled blogger. I have joined your feed and sit up for seeking extra of your wonderful post. Additionally, I’ve shared your site in my social networks

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