The Irish labour market and wages

The robust performance of the Irish labour market over the past number of years offers the most tangible evidence of the recovery in the Irish economy. With unemployment falling and vacancies rising, an obvious question that arises is the extent to which the current pace of growth can be maintained. Today, colleagues in the Central Bank published a paper examining this very issue, bringing together a range of labour market indicators to assess the current state of play including prospects for wages over the short-term. We also revisit Okun’s law and the Phillips curve drawing on the latest Irish data. We hope that this research proves useful as 2017 draws to a close. The paper is titled ‘The Labour Market and Wage Growth after a Crisis’ and can also be accessed by clicking this link.

8 replies on “The Irish labour market and wages”

Interesting paper and topical given the breakdown of Central bank inflation models, which are generally based on a Phillips curve. I wonder if we are already at full employment- the unemployment rate has been stuck around 6.1% for the past four months. That may be revised away, of course, but if not is a challenge to the consensus which sees the rate falling further, as indeed does the Central bank. Finance forecast the rate declining to 5.5% and remaining there, implying that is there definition of full employment, although I notice in the Budget documentation that they now project Ireland growing below the potential rate over the next few years which I would have thought would have been more consistent with rising unemployment.

“Institutional changes in the wage-setting process also have implications for future wage growth. As Leddin (2010) shows, previous bargaining agreements with benchmarking had a strong influence on wage setting across the entire economy, and not just those sectors formally signed up to the agreements.” (section 3.2 of article)

Unquestionably that is the major reason for lack of wage growth.
Further it is a damning indictment of the abandonment of a collective wage bargaining process; a process whereby benefits filtered out to the entire economy, to be replaced by a system of special sweetheart deals for the public sector, the banks, and the more powerful unionised workplaces.
No need to ask the question, qui bono.

Indeed there are causal reasons; and a tad inconvenient they are. Mainstream econs are not formally educated in these matters – yet. Maybe someday. Collective bargaining is a frightful con. But only a nutter would assert this.

Okum’s Law? The Philips Curve (a rectangular hyperbola)*? Predictions? This is mind-boggling stuff.

Fig B1.1 – shows a cluster with scatterd outliers: the dashed line is simply meaningless – useless. Fig B1.2 – shows a negative regression line. Well so what? What are the underlying causal economic factors involved here? They need to be identified. Is decreasing unemployment the mathematical opposite of increasing employment? Someone like to enlighten me.

‘Natural Rate of Unemployment’: only an uneducated twit or a Monorail intellect would be capable of dreaming up this piece of statistical and economic nonsense.

Theoretical statistics does allow for the concept of – “a value assumed to be true” – but only in carefully restricted circumstances. Basically its an inferred population parameter estimated from a sample using a quantitative determination method which is known to be in ‘statistical control’. I see no evidence of this type of control nor a reliable data set. Hence the use of the term – ‘Natural Rate of Unemployment’ is a completely meaningless. Its dreadfully misleading. Its economic garbage.

Figure 7; Real Wage Growth and Unemployment: – this shows a classic sigmoidal plot and indicates the complex Log-function interaction of two factors. It looks to me like a ‘buffered’ system. It may be interesting from an academic perspective to plot the overall response but what about those underlying, economic causative factors whose interactions with one another give rise to a sigmoidal plotline. However, if you cannot identify them and how they are interacting, then you are simply wasting both your time – and everyone else’s. Of course, knowing those critical factors and how they are interacting with each other does not axiomatically mean you can manipulate them in a mathematically predictable manner. Its just that your overall economic ignorance and uncertainty would be somewhat diminished.

This reference might enlighten a few folk: [Bewley, T. ‘Why Wages Don’t Fall in a Recession.’ 1999. Harvard University Press.] You think? Please be aware that what happens in the US is markedly different to what happens in the UK and IRL. Western Europe is different again. But still.

Attempting to predict some future event/s using a mathematical formula is an unbelievable behaviour. It smacks of paternalistic arrogance. Our economies are human constructs (albeit very complex ones) and the observable outcomes are related in some quite confounding manner to the actions (or inactions) of elite and economically powerful individuals or small groups of powerful individuals. The rest of us are just of little consequence – were atomized. Except we are not economic atoms whose behaviours may be described or predicted by doctrinare ideology and ‘beautiful’ maths – were sentient humans. Now I did not learn about this difference in my undergrad economic classes. Our reading lists were a tad narrow. We did learn a lot about a little – but emerged as ignorant experts.

Would we be economically ‘safer’ if our Central Bank were shut down? Looks like it.

The economic imperative of all industrialized economies is that they have (over the long-run) annual, compounding growth of each of their sustaining, foundation factors. Waged income is one of those foundation factors. The question for economists to investigate is whether waged incomes can persistently lag – and the overall economy not be consequently retarded. Or is it the opposite: the overall economy lags first and wages are …..? Or do economists actually know what a waged incomes is used for?

* If you performed a double reciprocal plot of the Phillips Curve data – would you observe a linear response? If the answer is yes, then you have a complex set of kinetic interactions occurring and you really do need to identify both the nature of the interacting factors and the manner of their interactions before making a ‘Horse’s Ass’ of yourself by asserting you know what is occurring unseen – and that you can mathematically manipulate the reaction matrix to ensure a predictable economic outcome.

Blind Biddy suggests that it might all be the result of a ‘marketing ploy’ by The Swedish Central Bank …

… which gave us Hayek, Friedmann, Scholes, de Kochs and de CATO institute ….QE and de <1%.

The most recent winner get the prize for 'discovering the Earthling' … and about time too!

Meanwhile …back to the CAPITAL-labour relation ….

This is a useful and interesting piece of work, but, not surprisingly, it tackles these issues from a perspective and using an approach and data that are eminently acceptable to governing politicians, senior officials and the armies of porfessionals who move in their orbit. Eurostat, fortunately, has a mandate to collect, asemble and present data and this allows some consideration of these issues from a different perspective.

For example, Eurostat collects data on the percentage of the population under 60 who live in households with a work intensity less than 20%:

And it does this for the total population under 60 and for income quintiles.

These data, admittedly for 2015 since Ireland and a few others are laggards, indicate that 19.2% of the Irish population under 60 live in households with a very low work intensity. This compares to 11.2% of the same population in the Euro Area (EA19). In the lowest income quintile Ireland has 62.5% of the population under 60 in that quintile. The EA19 has 35%. In the second quintile the figures are 25.6% and 10.5%. However, the relationship switches for the higher quintiles with 1.9% and 2.1%, resp. in the fifth quintile.

This provides further evidence of the impact of the Great Re-distribution in Ireland, the extremely high replacement rates (if calculated appropriately), the subsidisation of the “informal” economy, the disincentives to acquire necessary skills and the requirement for wages in a lower-skill activities to be much, much higher than they currently are to attract entrants from the indigenous population. So why would employers increase wages to what they would view as excessive levels when they can increase them a little and attract eager-to-work migrants?

There has to be a deeply political question about how long those in the third and fourth income quintiles will be content to contribute to the extensive cross-subisidiation of the extremely low work intensity members of the lower income quintiles.

If the Irish Labour market is so robust why are so many people still emigrating from Ireland ? And is continuing emigration the reason why unemployment figures continue to fall ?
CSO figures show that in the year to April 2017 30,800 people emigrated,more than double the pre-crash figures of 2006.
The Irish Times today publishes anecdotal evidence from some of those emigrants who make it clear they saw no future in zer hours contracts and job vacancies massively oversubscribed.
And why is almost full employment considered a major success in Ireland whereas a similar story in the UK – with the lowest unemployment figures in 42 years – warrants lurid stories in the Irish media about Brexit Britain in crisis.
The fact is the UK is six years into its economic recovery,its national debt has been reduced by two-thirds and the country still remains the most popular destination in Europe for inward foreign investment.
Ireland’s recovery,while welcome,is fragile and any one of a number of factors – Brexit,EU tax harmonisation etc – could easily send it into reverse.

People emigrate all the time. It seems to be innate in Irish people to want to live abroad for a while or travel. I lived in each of Australia, Canada and France (long and short stays) at different times and wouldn’t have missed the experience for anything. In my small social circle I know a primary school teacher and a public servant who have each taken a career break to live abroad and travel for a few years. Young Irish people are particularly mobile and generally will have ‘social capital’ abroad in the form of extended family/relatives to help settle in. Zero hour contracts exist in many other countries as well and housing can be as difficult to find as it is in Dublin. So I don’t set any store by the emigration figures. They are more than balanced or surpassed by inward migration and the excess of births over deaths each year. I expect the population to reach 5 million in 2020 (it is just under 4.8m per the last census but it is remarkable how even media commentators still say 4 million as the current population figure).

I think you are right about the UK economy though. Brexit is not going to be the economic disaster that some people think. I think it will be good for the Irish economy though in the long run (after a few short term bumps and bruises). I think anything that gets us out of UK supply chains and in to European ones will help price competitiveness in the Irish economy. You only have to check the difference between Sterling and Euro prices charged by major UK retailers to see how the Irish consumer is being gouged in a way that we are not being gouged by Aldi or Lidl.

People emigrate for lots of reasons and not all are unemployed, so the tax system , housing, type of jobs available and a broad range of cultural factors are at play. The media also prefer a simple narrative, and so ‘generation emigration’ has been the dominant theme. Net migration is a different story, however, and we now know from the 2016 census and the subsequent revisions that emigration in the 5 years to April 2016 was 40k less than previously thought, with immigration revised up by 27k, meaning that net emigration over the period was only 31k rather than the previously published 98k.Moreover it turned to net immigration in 2015 and that is now a factor driving the strong population growth seen of late.
That narrative matters because Ireland was slow to accept the real problem facing the economy – a massive and growing strain on the available resources, including housing, education, Health and the transport infrastructure. The media, or parts of it, certainly appear uncomfortable with the notion of full or near full employment- in what other country would there be a headline that ’50 jobs have been created’ when the numbers employed is around 2 million.

The UK is indeed around full employment and the consensus was indeed wrong in predicting a big immediate Brexit impact, although the economy does appear to be slowing now and sterling’s fall has had a big impact on inflation there and is squeezing real pay. The UK’s annual fiscal deficit has fallen, not its debt ratio, which is still rising.

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