Forfas: Review of Labour Cost Competitiveness

This report is available here.

Summary:

This report examines the scale of the competitiveness challenge facing Irish firms and considers the reasons and implications for the deterioration in Ireland’s cost base over recent years. It looks at recent labour market developments in terms of employment and earnings trends including setting earnings trends against the international context and wage movements in key competitor locations. The report also provides an overview of the key drivers of labour costs and the impact of a range of factors on Irish wage levels is assessed. Drawing all of this analysis together, the report identifies a set of actions designed to improve the efficiency of the labour market, facilitating employment creation and protecting real incomes.

27 thoughts on “Forfas: Review of Labour Cost Competitiveness”

  1. “Ireland had the tenth highest total labour cost level in the OECD-28 in 2009.”

    It’s like someone is treating the patient for a skin rash while the are hemorrhaging blood.

    The IMF made a nice job of analyzing our problems (like a lack of infrastructure), and then offering solutions to the problems that don’t exist. 3 years ago we had about 4.5% unemployment, now 13.5%. 9% of the workforce hasn’t suddenly become lazy.

    Perhaps the reason bond yields are still so high is because the planners are ignoring their own analysis. Its more supply side solutions for demand side problems.

  2. If most of the sectors in the protected supply-side weren’t imposing deadweight costs on everyone else there might be higher household disposable incomes and higher business profits to boost consumption and investment, resp., on the demand-side.

  3. @ Paul Hunt

    True. I’m not against getting some cream for the patients rash. However I give far greater priority to getting a tourniquet for the leg.

    By the time the supply side policies work half the country will have migrated. Can we not at least bandage the leg and give people something to do while waiting for supply side policies to work?

  4. @ Paul

    I interpreted what you said as product market supply rather than labour market supply. (I’m in favour of prod market supply policies that take effect in the medium to long term. I consider labour market supply policies a complete red herring while we have 13.5% unemployment.)

  5. @Bónapart Ó Cúnasa:
    “As James Tobin once said ….”

    Are you sure it wasn’t Jams O’Donnell?

    bjg

  6. @Bonapart, and Rory
    So, what could we do to close the gap? Borrow enough money to employ all the unemployed? What should we get them to do?

  7. An interest price comparison:

    The Irish Times sells in the UK for £1.10 and in Ireland for €2.00 (approx)

    Do they sell for a loss in the UK? Perhaps the UK edition is cheaper to print (if it is printed in the UK).Or maybe they are taking advantage of an olgiopoly position in Ireland.

    Same applies to the Indo, Sky, mobile phone contracts etc, a pint of Guinness

    The point is that it is not only public monpolies that are inefficient in Ireland. Everybody seems to take advantage of the small economy and push up their prices.

  8. @ Niall
    I don’t think its a fair comparison. It’s cheaper to go the cinema on a Wednesday afternoon than a Friday evening. Its just market segmentation.

    @ Hugh
    We need a lot of schools 🙂

    Seriously though, we should build the schools we need rather than use inefficient prefabs. There are plenty of other things that can be done from the NDP, but schools are my favourite example.

    If the austerity plans were going to work, they would have worked by now.

  9. Euro falling…internal deflation…a nation of empty hotels

    This could all equal a tourist boom if promoted correctly.

    Investment in public transport would help…

  10. @Niall:
    “The Irish Times sells in the UK for £1.10 and in Ireland for €2.00 (approx)”

    Does that apply in all of the UK or only in GB?

    I bought a copy of the IT last week in GB. It had much less colour than I would expect and but one section where the Irish edition would have had two or (until recently) three. I can’t, however, say how its contents compared with those of the Irish edition for the same day.

    bjg

  11. @Rory
    Sorry, but that’s really a bit trite…. A lot of schools. Thanks for that.

    As for austerity plans, the alternative – of borrowing even more money – was never even a possibility.

  12. @ Hugh

    Why, because our austerity programme is such a success story?

    The fiscal constraint is becoming more and more binding as money is dumped into the banks, but it is still possible to have a balanced budget expansion. We could increase some taxes/ cut spending and transfer that money into infrastructure development.

    Building schools is just my favourite example that would reduce unemployment quickly. However the IMF clearly stated we have an infrastructure deficit, and the NDP offers a menu to choose from.

    Do you really think Ireland is so perfect that there is no work to be done?

  13. @Rory
    As Colm Mc has said a few times, our “austerity” program consisted of borrowing more money. It turns out that our “austerity” program consisted of borrowing more money than was actually possible.

    I’d be all for cutting spending and liberating enough money to improve some infrastructure. Our govt has so far decided that the Croke Park deal and social welfare rates should be protected and that capital programs should be essentially erased. That’s not austerity, it’s dishonest generosity.

    @Andy
    If you hire a man to wiggle a handle at a pharma plant – a pharma plant based on decades of capital intensive r&d and hundreds of millions of dollars of construction – and that pharma plant produces very valuable output, does that justify high pay for the man wiggling the handle? Do the receptionists at an Intel fab get paid more than standard receptionist wage just because the fab makes hugely valuable output? The labour share of an economy like ours might well be lower than others.

  14. @Hugh
    In karls words:

    “There are some measurement issues that affect this calculation—in particular the existence of some very high productivity, low employment plants in the Irish pharmaceutical sector—but I’m pretty confident that the conclusions about both the trends over time in Ireland and the level by international standards can hold up to appropriate adjustments.”

  15. @ Hugh Sheehy

    “Do the receptionists at an Intel fab get paid more than standard receptionist wage just because the fab makes hugely valuable output?”

    Yes. This is a long-established empirical fact. In fact, when I’m teaching inter-industry wage differentials, receptionist salaries is the exact example I use. It’s not fully understood, but after eliminating all the standard market-based explanations, it looks like it may be down to perceptions of fairness.

  16. @Aedin
    That’s interesting. I suppose the receptionists at GS make an annual bonus too.

    However, I’d still be surprised to find the receptionists salaries linked to increases in the productivity of the fab.

  17. @ Hugh

    You are surprised because you think of wage setting in a perfectly competitive setting.

    Think of it as a bargain. Who can do more damage by withdrawing their labour. The receptionist in Intel (and mess up appointments in a factory producing millions a day) or a receptionist in a doctors surgery.

    Similar skill, but different outside options for the firms.

  18. @Rory
    As I have said before, I don’t think of wage setting in a perfectly competitive setting. Even if I did, the receptionist in Intel might well be to “a higher spec” than one in a doctors office and therefore might well be able to achieve a higher market rate. She or he would still be on a receptionist scale, and not on a cleaners scale or a chip designer scale.

    The idea that labour’s share of the proceeds in Ireland is below an international average is not necessarily surprising if a large portion of the economy involves work in highly productive fixed asset environment. One control room guy sitting on an offshore oil rig could have very high productivity. He might still be getting paid a rate similar to shift work in any industrial plant and the additional pay would be related to to the difficulty of hiring people to work offshore who have the right skills, not the value of the flow of oil.

  19. @ Hugh

    Capital intensity is an issue. Statistically is basically impossible to measure the level of capital, so we can’t control for this.

    However I don’t this can explain the trends in wage share (peaking around the mid-70s) of the past 50 years, or differences between Ireland and Denmark. Our export sector is very capital intense, but is it really much more so than Denmark?

  20. @Rory
    I’d agree that it’s difficult to measure the value of the capital, probably even if the IP is held in Ireland.

    On the rest there are two separate issues.

    First, there may well be major differences in Denmark compared to Ireland. Denmark operates – AFAIK – a more “middelstand” type of industry, whereas much of Ireland’s GDP runs through fronts (finance), heavy fixed capital (pharma, Intel), or IT operations (the MS, Google, etc., ), each of which can have huge output and profit per person. Denmark’s is probably a “healthier” society at some level.

    Other than that, the changing share of GDP accruing to labour has a variety of explanations.

  21. @ Hugh

    I did wage share/GNP once. I forget the exact results, but Ireland was somewhere in the middle.

  22. Both. If I remember correctly countries like Bulgaria held up the bottom of the table. I should really do it again, just a tad busy at the moment.

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