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Column: Irish labour costs making us uncompetitive? Hardly.

We’re told that wages need to be cut for Ireland to compete internationally – but the figures don’t bear this out, writes Jimmy Kelly of Unite.

Jimmy Kelly

THE CENTRAL BANK recently claimed that Irish labour costs are too high. They implied we needed wage cuts of up to 10 per cent to ‘restore competitiveness’.

They did not put forward any evidence or data to justify their claim. This is understandable. Because they are wrong.

UNITE has put together the true picture of Irish labour costs by using data from the EU Commission’s data agency, Eurostat. We examined the private sector (or what’s called the ‘Business Economy’). What does this picture look like?

Ireland ranks 10th out of the EU-15 countries, right at the average. Nine other countries have higher labour costs. However, this graph doesn’t tell the full story.

  • When Irish labour costs are compared to those of EU-Core countries (excluding the poorer peripheral countries), Ireland falls 11 percent below average, ranking second to last.
  • And when compared to economies with a similar structure as our own (small and open, heavily reliant on exports), Irish Ireland falls 18 percent below average, ranking last.

This hardly justifies the Central Bank claim that we are somehow ‘overpaid’.

The EU Commission data only goes up to 2010. However, they provide provisional data for labour costs growth between 2010 and mid-2012. This shows Irish labour costs falling even further behind EU averages.

With the exception of Greece, where wages are in free-fall in many domestic sectors, Ireland is the only country where labour costs are actually falling. In other countries wages are rising.

UNITE also compiled data on each of the economic sectors. I would like to draw special attention to the main low-paid sectors. Low-paid workers’ wages and conditions have been under attack from employers and the Government (in their recent ‘reform’ of the Joint Labour Committees). You’d think, listening from the propaganda, that Irish labour costs in the low-paid sectors are exorbitant in comparison with the EU-15. Here is the real information.

In the hospitality (hotels and restaurants) and wholesale & retail sector, Irish labour costs are seven to eight percent below the average of other EU-15 countries. When compared with EU-core countries this falls 16 to 18 percent below average. And when compared to similar small, open economies this falls a staggering 26 to 27 percent below average. That puts the propaganda in context.

Deformed economy

There’s this idea that driving down wages will somehow restore our competitiveness. Never mind that other small open economies in the EU have much higher labour costs – and are ranked as some of the most competitive; the fact is that the Irish economy has always been highly productive. Forfas looked into this issue recently and found that, even when adjusting for the accounting practices of multinational companies, Irish productivity was high by EU-15 standards.

In pre-recession 2007, Irish workers were still producing more per hour than their counterparts in the EU-15 – and that’s with a sizeable proportion of the economy involved in construction, a relatively low productivity sector. It is certainly true that Government policies deformed the economy through pump-priming the property boom – but Irish workers still went on working and producing at very high levels.

The situation has improved since 2007 – especially as we have become less reliant on construction activity. The gap between Irish and EU-15 productivity has grown. According to Forfas:

Irish productivity growth rates have averaged 2 percent per annum between 2007 and 2011 (with particularly strong growth recorded in 2009 and 2010). This compares with 1.3 percent in the US, 1 percent in the OECD and 0.4 percent in the Euro area.

In fact, labour costs are not even an important consideration in our major export sectors. Again, according to Forfas, labour costs make up less than 14 percent of overall operating costs in our exporting sectors. In the Chemical/Pharmaceuticals and Computer Services sector – which makes up 60 percent of all our exports – labour costs make up eight percent of operating costs. We could slash and slash wages and it would make almost no difference to the competitive bottom line.

So we have average to below-average labour costs and high productivity (with labour costs playing little role in in our export sector) – why has the Central Bank ignored these important facts?

Maybe for the same reason that they didn’t estimate the damage that their cut-wages policy would have on workers and the economy. For a low-paid worker (let’s assume a single person on €25,000) a policy of cutting wages by 10 percent would mean a loss of over €33 per week. For a worker on €50,000, the loss would come to €46 per week.

This is bad enough – driving down people’s living standards, forcing more into arrears and debt. But the Government is a big loser as well. For the low-paid worker, the loss in tax/PRSI revenue would be €20 per week, while for the person on €50,000 the loss to the Government would be €60 per week – even greater than the loss to the employee. And none of this counts the losses in VAT and Excise due to lower consumer spending.

In short, the Central Bank’s proposal would drive down people’s living standards, increase the deficit and collapse domestic demand with all the impact that would have on unemployment and business closures. The Central Bank’s proposals would make a wasteland of the Irish economy.

The Central Bank should clarify their comments. And this clarity should be based on evidence, not on an ideology that is costing us jobs, prosperity and our next generation’s ability to live in Ireland.

Jimmy Kelly is Regional Secretary of Unite Ireland. Byline photo by Mark Stedman/Photocall Ireland.

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