How can lack of competitiveness be the cause of the global increase in unemployment? Every country can’t be losing competitiveness, since competitiveness is a relative concept. By definition, there must be some countries in the world today that are gaining in competitiveness. Actually, if the stories in the press of wage cuts being imposed in Ireland are true, Ireland is likely one of them. Yet, unemployment is rising in every country, nowhere more so than in Ireland. Do the unemployed in every country have to hang around doing nothing until every country improves its competitiveness? Which, of course, is a contradiction in terms.

The real explanation for the increase in unemployment worldwide is lack of demand, nowhere more so than in Ireland. The wage cuts being imposed in Ireland will reduce demand still further.

I see my error on the Exports figure. Combined with your latter correction, my calculations are now much more in line with yours.

Sorry for the confusion.

a) Irish wages have been rising at a fast rate, and
b) this was almost certainly caused by the domestic property boom and
c) this has been very unhelpful from a competitiveness perspective.

However, that is not to say that Ireland is now significantly out of kilter in terms of international competitiveness (though rightly is a red flashing light).

Absolute measures of payroll costs would show that while Ireland has become more expensive, it is not out of line. The UNITE document comparing private sector wages and employers PRSI rate show that (even allowing for subsequent slippage from 2005-2008), we were around the EU average. Of course it is telling that UNITE did no corresponding study of public sector pay, which would have told a very different story.

Could it be that:
1. In 2000 Ireland was an over-competitive economy. Our very fast economic evolution meant that our wage rate had not caught up with our now impressive export base;
2. This has not been easy to see from 2003-2006, as the export sector was in the bottom of a ‘U-shape’ caused by the transition out of electronics to new areas of comparative advantage. Only since then have we started to see Pharma / services exports more than make up for the fall in electronics, i.e. we were on the upper right hand part of the ‘U’. This upward momentum has been rudely interrupted by the international economic woes;
3. Private sector wages in Ireland are probably in-line, though to sum up John’s point, we definitely need a competitive devaluation as the unwinding of the domestic imbalance has been so dramatic;

Finally, non-pay costs are high, which suggests that productivity enhancement in locally provided services has to get to get more attention alongside the other fixes. This is one reason that life is expensive for consumers in Ireland, while not as expensive for businesses (consumers don’t have employees).

But would you not agree that the determined resumption in 2000, after 15 years of trendless fluctuation, of an upward trend in relative wage per employee, could nevertheless have eroded the competitiveness of labour-intensive firms to the point where employment in the exposed sectors may be very vulnerable.

In other words, could it not be that employment, just like imports, has been sustained by the borrowing boom despite underlying loss of labour competitiveness?

If I get a chance I’ll paste here my slightly out-of-date chart that shows the dramatic change in competitiveness trend I’m talking about (the data — at least for the later years — are natuonal compenstion per employee vis a vis 35 industrial countries from Eurostat AMECO database.

I take your point about the need to maintain some perspective. However, much of the attention energy costs have received has been comprised of dubious Government-sponsored efforts to justify the excessively high costs.

I’m sure Colm McCarthy, in his role as Chairman of An Bord Snip Nua, has eyed up some juicy low-hanging fruit, but those of us who are less-exalted and labouring in other corners of the vineyard must tackle the bushes within our reach. In addition, my preliminary estimates suggest that a combination of dysfunctional energy policy and regulation is adding an additional and unnecessary €500 million a year to electricity and gas costs. This is impacting on the budget of every household and business in the state and could be stripped out relatively easily. And it is also perhaps worth noting that high utility bills exert upward pressure on wage demands - and one would expect the reverse to be true also.

> Exports have increased from €101bn (2000) to €150bn (2007). Your figure only related to goods, while the growth has been in services;

> I must also admit an error – I just included direct income repatriation in my initial calculation, and should have included indirect as well. Allowing for this, instead of an increase from €21bn to €33bn in terms of the contribution of the export sector, it should have been €21 bn to €26.5 (I can send the excel sheets to anyone interested). However this doesn’t change the core point. Our export sector has grown at a healthy rate, during a period of a momentous transformation away from electronics, towards a pharma/services composition.

Paul: Energy costs are a relatively small proportion of total costs (I think 2%) against almost 2/3rds in terms of wages. While not-unimportant, energy costs have received probably more attention than they warrant. As John Fitzgerald once said, many a mole hill makes a mountain, so there are a number of non-pay costs we should be examining. An exclusive focus on one may not be optimal, though any pressure on the CER has to be welcome!

My main point remains: does it not now seem obvious that the BOP deficit was a function of the domestic imbalance, not an external imbalance? Further, in terms of inwards FDI flows, why does that same NCC report show that we still fare so well? Are either of these facts consistent with a country with significant competitiveness imbalance and relative cost disadvantages?

However, with regard to competitiveness per se, the National Competitiveness Council presented some good quality analysis in its 2008 reports (published in January 2009) that fully supports Graham’s final “scary” comment. Nevertheless I would caution against an excessive focus on relative wage costs and productivity - important and all as these are. Utility costs - in particular, energy costs - and professional service costs are equally - and scarily - out of line with those of our major trading partners.

My focus is primarily on the costs of electricity and gas. The recent falls in international energy prices mean that domestically controllable costs comprise, approx. 60% and 50% of the final prices, respectively, of electricity and gas to smaller volume final consumers. Energy sector regulation has proved to be spectacularly damaging and dysfunctional in Ireland and these controllable costs on a per unit basis are significantly higher than those in most of the established EU member-states.

The Commission for Energy Regulation (CER) recently issued an information paper on the methodolgy it proposes to apply to set the revenues and tariffs for the electricity transmission and distribution networks from 2011 to 2016. These comprise a signifciant proportion of the domestically controllable costs in final prices. The CER relies on high-level qualitative descriptions of the methodology it uses to determine assets valuations for regulatory purposes and the resulting stream of annual capital charges which comprise approx. 70% of allowed network revenues. The limited evidence available suggests that the CER’s approach is a major contributor to excessively high electricity and gas prices in Ireland. The CER, not surprisingly has resisted repeated requests to publish the calculations it performs.

On a number of grounds this is entirely inappropriate and unacceptable:

1. Public trust in, and acceptance of, regulation relies on external scrutiny of the process and of how key determinations are made.
2. Most final consumers do not have the time, resources or specialist knowledge (or the resources required to retain the necessary specialist knowledge) to apply the necessary scrutiny of the Commission’s determinations.
3. Best international regulatory practice requires full and transparent disclosure.
4. As regulated, public, majority publicly-owned, open access network businesses no issues of commercial confidentiality arise.

This is simply another example of the ability of regulators in Ireland to evade proper scrutiny.

I have written, once again, to the CER requesting full and comprehensive publication of the calculations it performs. I fully expect some clever ploy (or ploys) will be dreamed up to justify non-publication.

Then I wonder, though, what it is I’m missing as I go through the two CSO publications:

http://www.cso.ie/releasespublications/documents/economy/current/bop.pdf

and

http://www.cso.ie/releasespublications/documents/external_trade/current/extrade.pdf

The “income” deficit on the balance of payments increased from 14bn in 2000 to 28bn in 2008 (most of this looks like profit repatriation); while exports for the same period only increased marginally (from 83bn to 86bn).

Of course, not all repatriated profits are attributable to exports (foreign owned companies selling in the Irish market must also repatriate, non?), still these numbers are moving us in the opposite direction to your central point here, which is that net contribution of exports (I guess this is total exports, minus intermediary imports, minus profit repatriation on exports) is growing fast in the naughties.

Am I doing something very wrong?

The problm with the micro-level approach is that we don’t know the productivity in MNC enterprise, and could easily end up with a wrong diagnosis of our problems. Given that our BOP deficit seems to be disappearing as the domestic imbalance disappears, and that FDI per capita is well ahead of the virtually every other developed western economy, it would suggest that whatever disadvantages we have, we also have significant advantages which we may not be measuring.

Which leads me to ask:

How much of the exports picture can be attributed to transfer pricing from multinationals benefitting from our low corporate tax rates?

I mean, if I’m Coke, I want all my costs to accrue in Ireland (ie so my profits are cheaper to tax), pushing up the nominal export value of my syrupy stuff which gets sold into the (High-tax) finished markets on the continent, right? Of course, these artificially expensive exports are just a tax trick and shouldn’t be confused with actual productivity.

I think this idea can be traced back to a paper by Bartelsman and Beetsma (2000), available here:

http://www.cepr.org/pubs/new-dps/dplist.asp?dpno=2543

So, given this risk of mismeasurement, it seems logic would dictate we should adopt a more inductive approach to determining competitiveness. For instance, looking at micro level indicators of productivity and wage costs for Irish visavis other EU workers.

And that is a scary comparison.