The Irish Economy

The Department of Finance has now released the report of the Review Body on Higher Remuneration. The report here and a summary is here.

Eilis Quinlan of ISME has been at it again. On the Last Word on Today FM this evening, she again said that it was a mistake to say the public sector pension levy was a pay cut. The key argument she produced as to why the reduction in net take home pay related to the levy was a pension contribution rather than a pay cut was that it was tax deductible, just like other pension contributions.

Let’s think about this for a second. Consider a worker on €50,000 facing a 20% marginal tax rate. Now the government introduces a pension levy that see her gross pay reduce by €3,000. The pension levy isn’t taxed, so the worker now has a taxable income of €47,000. Consider the alternative in which her pay is cut by €3,000. In this case, the worker also has taxable income of €47,000.

So, in either case, whether it’s a pay cut or a “tax deductible” pension contribution, the worker has the same level of taxable income—the pension levy may be tax deductible but the government also can’t tax salary that a worker hasn’t been paid.

In other words, from the point of view of the worker’s take-home pay, the pension levy is identical to a pay cut. Now, of course, there are reasons why various tax breaks exist to encourage people to make pension contributions: The government wants to encourage people to put additional money aside to build up their pension entitlements. But, of course, the payment of the “pension levy” doesn’t add a cent to public sector worker’s pension entitlements.

To recap, the fact that the pension levy was tax deductible doesn’t make it different from a pay cut. It makes it exactly like a pay cut. And the fact that it doesn’t add to pension entitlements means that it has all the features of a pay cut and none of the features of a pension contribution.

To be honest, I don’t see how it serves the interests of the hard-pressed small and medium-sized businesses of Ireland to have the Chairman of their representative organisation continually making provative and misleading statements that only serve to upset thousands of public sector workers that have experienced very significant losses in take-home pay.

The government has cut public sector pay in the budget. A description of these cuts is available on page 27 of this document.

Pay has been cut by 5 percent for low earners gradually rising up to 8 percent for those earning €125,000. The cuts stay at 8 percent between €125,000 and €165,000 and €175,000. Those earning between €175,000 and €200,000 have cuts of 12 percent and those earning over €200,000 have cuts of 15 percent. An Taoiseach Brian Cowen gets a special cut of 20 percent.

Annex A of the document linked to above also described the cumulative cuts for different classes of workers, including public sector workers. To give one example, a public sector worker earning €75,000 in a one-income household with two children over 6 years of age has had a total reduction in net pay since last year’s budget of 18.2%. The comparable figure for a similar couple in the private sector was 5.4%.

I know there are many who will feel that these cuts have been too extreme. More interesting, I guess, is whether those who favoured cuts in public sector pay now think that this is enough or think that the government should come back and cut public pay some more.

I’m almost reluctant to write about this topic because of the level of hysteria that it provokes. Still, we cannot deny that a national public sector strike is an important topic worthy of debate on this blog.

My overall reaction is that the debate about public sector pay is descending, perhaps predictably, into a damaging battle between vested interests. There is much to dislike on both sides of the debate.

(more…)

John O’Hagan writes in today’s Irish Times on the topic of public sector pay: you can read it here.

This new paper responds to the recent CSO study and also tackles several new dimensions of this question.

Paper here.

Abstract:

This paper provides a sub-sectoral analysis of changes in the public-private sector pay gap in Ireland between 2003 and 2006. We find that between March 2003 and October 2006 the public sector pay premium increased from 14 to 26 per cent and that there was substantial variation between subsectors of the public service. Within the public service the premium in 2006 was highest in Education and Security Services and lowest in the Civil Service and Local Authorities. In the private sector the pay penalty in 2006, relative to the public sector, was most severe in Hotels & Restaurants and in Wholesale & Retail and least severe in Financial Intermediation and Construction. The paper tests for the sensitivity of the pay gap estimates using a matching framework, which provides a stronger emphasis on job content, and finds the results to be broadly comparable to OLS. Finally, the study highlights the problems associated with controlling for organisational size in any study of the public-private pay gap in Ireland.

The new edition of the Economic and Social Review is now available online. The edition contains two policy papers. One is this paper by Eilish Kelly, Seamus McGuinness and Philip O’Connell on public sector pay rates. I think Richard Tol is going to open a thread on the other paper which focuses on the carbon tax.

Last week, the CSO released the latest results from the National Employment Survey, which reports detailed information on earnings across all sectors of the economy.  The data from the survey relate to October 2007.

The first media treatment of the story that I saw was the Sunday Independent’s lead story saying the public sector is “now earning 50 per cent more the private sector.”  My reaction was that while the headline might be true, this wasn’t a very useful way to think about the issue of public sector pay. 

The report also details a host of other well-known patterns: Those with more education earn more, older workers earn more, those in professional occupations earn more.  With the possible exception of Vincent Browne, I’m not sure there is anyone out there who would draw the implication from these figures that the government should intervene to eliminate all these gaps.

(more…)