Month: August 2009

Crass and Ill-Informed Opinion on Science?

Professor Luke O’Neill of TCD reckons that the recommendation of the Bord Snip report to cut €100 million from our state-funded scientific research budget is “crass and ill-informed”.

Professor O’Nell is obviously a man who only puts forward well-informed opinions. For that reason, I was interested in his statement that

it is also well known that investment in basic research, as well as being an investment in what economists prosaically call human capital, pays back on average three to one in the long run. What other sector that the Irish government funds can boast such a return?

Funnily enough, well-known facts are sometimes the trickiest to actually find evidence for.

I’m willing to be pursuaded that Professor O’Neill’s well-known fact is actually a fact. I’m even willing to be pursuaded that it’s well known. But I’ll need some help here—can people tell me the source of this well-informed opinion and whether this source applies well to Ireland?

Where are the Wage Cuts?

Q1 Earnings data were published by the CSO ten days ago, and I’ve only just got around to having a look at them. The data refer only to Industry (Manufacturing, Mining & Utilities) and Financial Intermediation; the new Earnings, Hours and Employment Costs Survey on which these data are based also collects for Construction and Distribution and Business Services, but data on these sectors haven’t been published yet, so the most up to date figures for these refer to December 08.

I went to look at the data because I had a hunch that earnings cuts were being driven by flat hourly pay and falling hours.

I was concerned about this as it seems to me that hourly earnings are more important than weekly earnings for competitiveness – where hours of work have been cut, and earnings have fallen only for this reason, we should see this being reversed if and when demand picks up again, so this won’t result in a long term improvement. (It is possible that the recession has allowed employers to reduce overmanning/featherbedding and that this will be a permanent effect on productivity, but I doubt if that’s the main story.) 

In any case, I was wrong: the flat pay just doesn’t seem to be there. In fact, the short answer to the question in the title is: in Financial Intermediation and Mining. Everywhere else, there are wage rises.

For industrial workers, average hourly earnings rose by 5.9% from Q108 to Q109. This figure includes bonuses and overtime payments. Weekly hours fell by 2.4%, though, so the increase in average weekly earnings was just 3.4%. Within industrial workers, weekly earnings of those in Mining fell by 8.1%, but this was entirely due to a fall in hours of work, with hourly wages actually rising by 1.5%.

Within Industry, a breakdown by occupational category is also given. Managers & professionals’ hourly pay rose by 3.5%, and their weekly pay by 2.9%; Production workers’ hourly pay rose by 5.2%, weekly by 1.2%; only Clerical workers’ pay has fallen – the hourly figure is down by 0.9%, and the weekly is down by 1.2%. Interestingly, the reason the headline figure – the +5.9% I mentioned above – is higher than any of these occupational category components is because of a pretty big shift in the composition of workers –  the number of Production workers has fallen by 12.3% whereas the number of Managers has risen by 2.1% and the number of clerical workers by 1.9%. So the proportion of chiefs has risen.

For Financial Intermediation, average earnings have fallen, and all the action is in bonuses. Hourly base wages have actually risen by 5.4%, but bonuses fell by 65% between Q108 and Q109. The average bonus was 30.6% of base salary in Q108 but ‘only’ 10.1% in Q109. Because of the collapse of bonuses (relatively speaking – the average industrial worker got a bonus of 7.4% of base pay in Q109), average total hourly earnings fell by 11.1% and average weekly earnings fell by 12.7%.

As I mentioned, CSO hasn’t published the Q109 figures for Construction or Services yet. But the figures for Q408 compared to Q407 showed that while average weekly pay in Construction was down 2.4%, average hourly pay was up 2.3%; and in Services, weekly earnings were up 3.1% between December 07 and December 08. No hourly figures are given.

It all seems a far cry from the heady days of April, when very large nominal pay cuts in the private sector were being discussed in the media. In a post on this blog, Colm McCarthy tentatively concluded, on the basis of some private surveys, that “[B]earing in mind the different periods covered, it looks as if the private sector pay cut overall, allowing for the small number paying increases and the larger number of freezers, has already reached 6 or 7%”. I was sceptical, but thought that 3% was quite likely.

Is it the case that Industry alone is escaping pay cuts and that when the Q1 figures come out for Construction and Services, the numbers will add up to substantial nominal cuts? Or were we just dreaming? Did we just want to believe that Irish workers were proving very amenable to the kind of cuts needed to improve competitiveness? Or is there some other detail of the data that I’m not appreciating that’s masking the truth?

New IMF blog and Potential Output

The IMF has established a new blog: the link is here.  The most recent entry is about the measurement of potential output and the adverse impact of financial crises on the level of potential output – interesting reading.

Reforming Financial Regulation

The Annual Report of the Financial Services Consultative Industry Panel has been widely reported, and in particular an Addendum which addresses the theme Structural Reform of Financial Regulation in Ireland. The Irish Times report was headed “Quality of regulatory staff must be a priority…” and captures effectively the views of the Panel to the effect that the structure and rules associated with financial regulation may be less important than the personnel recruited to carry out the regulating. The Panel suggests that at all levels of the regulatory organisation responsible for financial regulation there should be staff with the necessary knowledge and expertise in national and international financial markets and that this can only be achieved through the recruitment of senior managers from the financial sector, with appropriate financial rewards.

I should first say that my expertise is in regulatory regimes generally, not in financial regulation in Ireland or any other jurisdiction. From this generic perspective I agree that an emphasis on the people, the knowledge and the competencies within the regulatory organisation is correct and that this may be more important than the content of the rules (since an effective regulator can blow the whistle on practices which are permitted but undesirable). However, expertise is not the only requirement for a credible and effective regulatory regime. Such a regime additionally requires a degree of independence both from the industry and from ministers. The requirement of such independence is not simply a matter of legitimacy – there is likely to be limited tolerance for putting foxes in charge of chicken coops in the current climate – but also a key aspect of effectiveness.

Expertise is a complex idea. Industry experience is valuable because those who have it know how things are done and understand the strategies of those they are overseeing. They understand the narratives put forward by regulated businesses and know what to look at to assess their credibility. Thus strong industry expertise gives a regulator a form of independence in the way that it uses knowledge. But in some instances it is equally important that a regulator is is capable of challenging the working knowledge of an industry. On one analysis the primary failure underlying the current financial crisis is the failure of banks to understand the systemic risks which their actions created.  A regulator which fully mirrors the industry which it oversees is unlikely to be able to re-think the appropriateness of industry conduct, but only to assess whether particular businesses are within the normal range of what is considered appropriate at a given time.

A further issue surrounding the recruitment of regulatory staff from an industry arises from the observation that regulators who exhibit a high degree of shared experience (educational, industry, inspection) with those they oversee are liable to be less stringent in their application of regulatory rules than those with less shared experience. This ‘relational distance’ hypothesis, developed by Donald Black in the 1970s, has been tested and found to have considerable validity both in the context of business regulation in Australia ((by Grabosky and Braithwaite, 1986) and in the context of regulation of public bodies in the UK (by Hood, Scott and others, 1999). In the latter study we were struck by examples of regulatory design which opted for a deliberate ‘mixed relational distance’. So, for example, within the Inspectorate of Prisons, noted for robust independence and with a strong track record of re-thinking the appropriateness of prison standards, the head of the Inspectorate was routinely recruited from outside the prisons industry (a judge, a retired general, etc), whilst the next tier down within the organisation comprised seconded prison governors with strong industry expertise.The mixed approach can be developed at other levels of a regulatory organisation. In a small country such as Ireland we should be aware that shared educational and social experience is likely to be as important in generating low relational distance as shared industry experience. I believe this is one of the reasons why some have suggested a need to look outside Ireland for key regulatory officials in the financial sector (as has happened in the case of the Garda Inspectorate).

I do not think this mixed approach to staffing regulatory agencies is inconsistent with the views of the Consultative Panel. But it is important to recognise that an approach to staffing the new regulatory structures which fails to look beyond the experience and knoweledge of the industry is likely to be limited both in effectiveness and legitimacy.

Ahearne and McCarthy on the Banking Crisis

Today’s Sunday Business Post carries two interesting opinion pieces.  Alan Ahearne writes a defence of the NAMA approach (you can read it here), while Colm McCarthy recommends an inquiry into the banking crisis (you can read it here).  The latter suggestion has been adopted elsewhere (for example, in Iceland).