Wealth and the Periphery Crisis

Ned Phelps has an op-ed in today’s FT.  He argues that one reason that the periphery got into trouble is that household wealth rose quickly during 2001-2007, discouraging work effort and thereby contributing to the rise in wages relative to productivity.

13 replies on “Wealth and the Periphery Crisis”

“household wealth rose quickly during 2001-2007, discouraging work effort and thereby contributing to the rise in wages relative to productivity”


The main reason wages rise quickly in the private sector during a boom is because employers fear they will lose people with demand from competitors being > supply of experienced people. I’ve been in these ‘decision making’ meetings where the wages have been increased simply to stop people walking. It has sod all (or very little anyway) to do with household wealth and I don’t recall too many people working any less harder during 2001-2007 either. Mind you, wages are soon brought back again when supply > demand, as we have been witnessing.

I don’t know the logic that drives wage rises in the public sector as I’ve never worked in it. Did they work less hard in that sector over that period and not justify their pay rises? Did they take their foot off the pedal as the value of their houses increased? I’ve no idea.

On an anecdotal level, older people in my field have told me that they never worked as hard in their lives as they did in the last decade. Everything became more urgent and pressurised. Hours were longer and holidays were shorter. A relative who went to work in the Netherlands said that her experience was that everybody in Holland took things more slowly, right down to the level of shopkeepers who would leave you waiting while they nattered with a customer (something Ireland used to be famous for). In essence, we had become amore american in our approach to life.

Wages may have increased relative to productivity in Ireland during one of the most dramatic property bubbles in global economic history, but anybody who suggests that Irish people lack work effort is spouting nonsense.

I was at the coalface of this back between 2004 & 2007 , the new hungry middle class eastern workers replaced less productive working class Irish workers in a vicious race to the bottom.

So productivity surged but wages went down and what little wages they got were transfered back to their Home countries – so local domestic demand would have collapsed without credit growth.
Nothing complicated but not a politically correct statement.
But this was a tempory perhaps decade long event – as eastern workers get more comfortable with their positions they act like everybody else over time.

England has similar problems with Irish workers in the 50s ,60s & 70s when our GNP was larger then GDP because of labour remittances.

As for personnel malinvestment caused by near credit hyperinflation / deposit growth – well yes , of course.
Me thinks this credit inflation was used to counter the lack of demand from higher labour productivity but lower real demand from wages.
The mechanism to sustain this was low fiscal debt relative to credit (fiscal debt works by subtracting from credit deposits)
I also think much of the poor investment withen Europe is because former state run Utility companies were being turned into privatised vehicles.
Once private shareholders are involved in this area its the fiduciary duty of the company not to invest large sums in capital intensive projects.

Therefore there was no longer any vector towards core capital investment that traditionally increased the redundancy of former nation states – making these new market states now more vulnerable to outside shocks.
Ireland is the most extreme example of a country engaging in a manic export drive so that it can afford its massive imports.
This country was always walking on a tightrope – but public policey was all about making the rope thinner as this improves profitability until it does not.
Its merely decapitalisation to suatain tempory profits.
You will always slip eventually under such circumstances.

We are falling now…………


“but anybody who suggests that Irish people lack work effort is spouting nonsense”

I honestly couldn’t agree more.

I get to see inside many financial services companies – both in Ireland and abroad – and I’m neutral: what I observe though is less and less people doing more and more work in Ireland (the load usually increases after the latest ‘efficiency drive’ aka ‘redundancies’ has taken place and there are less people handling the same volume of work)…. and in a number of cases, for less money and security too. It’s also noticeable that even when there isn’t an official ‘efficiency drive’ on, people that leave aren’t being replaced.

The added dimension to that now – which has become very noticeable talking to employees of these companies since 2007 – is the very real fear of losing their jobs. It’s the norm to see most people in before 8am and not leaving until after 6pm, with any form of lunch break being replaced by a sandwich at the desk. 10-15 years ago, you wouldn’t have stood in front of the main entrance to an office at 5.01pm or you would have been killed in the rush of lower paid workers leaving the building. You don’t see that rush today.

I’m sitting looking over the river towards the Ulster Bank building. 600 people leaving there soon as announced this morning. Minister of State for Finance Brian Hayes said the Ulster Bank redundancies were “inevitable.” As much as I feel sorry for them, I also feel sorry for those that will be staying there. As this kind of crisis rolls on, working life eventually becomes nothing more than a stressful misery and everyone, even your children, suffers.

BTW – can’t say I’ve noticed Dutch colleagues taking it any easier but their punctuality is not the best.

Ned Phelps is another commentator with his blinkers on. The rise in wages was caused by rampant inflation sue to credit junkie banks lending out too much money into the economy.

It’s the banks stupid.

I find the argument in the article unclear. Where did the increased wealth come from (apart from the state bonuses and social wealth he refers to explicitly)?

Is the suggestion that it came from increased wages, as the commentators above seem to assume? Is Phelps proposing a kind of Chayanovian withdrawal from drudgery once a desired standard of living is reached?

Or is the reference to ‘unearned’ wealth – i.e. something like property values?

I had kind of hoped from the title that the article might have included a discussion of the effect of increased female participation in the labour force. It’s often argued that middle class households increase female labour force participation in order to maintain the standard of living they are accustomed to, in the context of declining men’s wages. But in a boom where men’s wages are increasing and demand for labour in feminized occupations is also increasing, the effect might be to encourage households to accumulate wealth by saving. But the fact that, in Ireland, women continued to enter the labour force during the boom seems to me to contradict the argument about productivity (at a household level of analysis anyway).

I dunno, but I’m sure some of you will explain it to me!

@ zhou_enlai

Labour productivity is poor in Japan while there is a tradition that you cannot leave the office before the boss.

American drug companies do wonders for Ireland’s productivity in the capital intensive business by achieving a big jump in output without added jobs (pharma+ medical devices account for about 62% of goods exports).

Irish workers in the lower strata were cut to pieces after 2001 & 2004 respectivally with a huge amount of overtime payments lost – but the banks gave them extra credit to continue consumption.
So instead of going for more pints on a Saturday night they got a Mortgage & stayed at home – creating a massive malinvestment nightmare in fixed capital as drinking in Ireland before the smoking ban puritans was a voluntary tax payment which destroyed money before malinvestment was allowed to happen.
Its just the middle class PC culture which fails to accept how the Irish tax & culture accepted each others strange ways & really worked on the ground.

@PR Guy

I’m not sure why you think that people in the public sector worked less hard during the period 2001-2007 than before it. Frankly, the public sector is too heterogenous to make statements like that.

Before any employee gets more pay the income has to be there to support it. Next is the lower the unemployment rate the more pressing it is to pay well. There was a virtuous cycle in Ireland up to 2007, householders got richer quarterly promoting a feeling of wealth. Low unemployment so income assured. Employers operating profitable business’ capable of granting increases. Gov’t groaning under the weight of its revenue, granting increases to salaries and spending on social supports like the boom would go on forever.

Then the overhang of housing and commercial space on the market became apparent and the virtuous cycle became the vicious cycle. This was bound to happen the Lehman schemozzle may have moved it up a few months but the fact is the house of cards was vulnerable to shocks.

Then the Gov’t back stopped the banks, this will go down in history along with 1916 and O’Neills defeat at Kinsale, it will be found in history books 400 years from now. The rest we are living through and long may we prosper.

@Kevin Walsh

“I’m not sure why you think that people in the public sector worked less hard during the period 2001-2007 than before it. Frankly, the public sector is too heterogenous to make statements like that.”

Please read my post again as that is not what I said.

Paraphrasing (because I can’t be bothered to page up and look) “I’ve never worked in the public sector and therefore couldn’t say whether they did/do work hard or not – so my comments only apply to the private sector,” is what I actually said.

Increased remuneration makes the peasants lazy but makes the ‘wealth creators’ more productive. Hmmh.

Economists are now straying into psycho-analysis or neuroscience, its not clear. This genius thinks the basic human reward mechanisms operate in a diametrically opposite ways in the upper and lower orders.

Priceless. You couldn’t make this stuff up. Call yourselves scientists?

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