The High Cost Of Low Wages

at

90387492Michael Taft

From top: Taoiseach Enda Kenny at the Low Pay Commission report on the minimum wage last year; Michael Taft

The relationship between wages and competitiveness is not a crude reductionist equation.

We pay a real cost for our low wage levels.

Michael Taft writes:

There is a narrative among the Left that claims that capital has not wasted the recessionary opportunity, that capital has exploited the crisis to depress wages in order to boost profits.

We should, of course, be sceptical about such sweeping narratives. We live in a complicated, complex world where exceptions and caveats invariably rule.

So let’s test this claim and see if it holds – at least in Ireland; at least on the issue of wages.

There are many ways to measure wages (Dr. Tom Healy of the Nevin Economic Research Institute looks at it this way). I will use employee compensation as a percentage of Gross National Income (GNI).

Employee Compensation: this is made up of the direct wage (what the employer pays the employee) and the ‘social’ wage (what the employer pays into a social insurance or similar fund – out of which employees access public services at below-market costs such as health, and in-work benefits such as sick-pay, maternity benefit, etc.).

Gross National Income: this is essentially GNP. This is not an optimal benchmark as it excludes a significant amount of wealth that is generated in the economy.

However, it does have the advantage of excluding both multi-national profits that are generated in other countries but end up here for tax avoidance purposes, along with profits that are actually generated here but then repatriated. Therefore, GNI is the bottom-line of bottom-lines.

So how do Irish workers fare?

1

We don’t fare well.

Up to the crash, when wages were rising, Ireland was still below the main European comparators – the EU-15, Northern and Central European economies (NCEE – this excludes the poorer Mediterranean countries), and other small open economies – (Other SOE, countries with a similar open, export-dependent structure: Austria, Belgium, Denmark, Finland and Sweden).

When the crash hit, the graph shows Irish wages spiking but one has to be careful. Between 2007 and 2009 wages rose – as a proportion of GNI (from 46 to 52 percent of GNI); yet, during this period total wages actually fell by 6 percent. In fact total wages fell a further 8 percent up to 2012.

The reason for the spike is not rising wages but falling national income.

But as we came out of the recession, wages didn’t recover their pre-crash levels. Between 2000 and 2007, Irish wage levels averaged 44.2 percent of GNI. In 2017, the EU estimates this will have fallen to 39.6 percent.

2

And it’s not like Ireland is a ‘poor’ country.

When we measure GNI per capita we find that Irish levels are 10 percent higher than the EU-15, marginally ahead of Northern and Central European economies and at that same level as other small open economies.

Unite the Union recently published its The Truth About Irish Wages. Using EU labour cost data it found that Irish wages are well below the European benchmarks.

But the real story is how low Irish wages in low-paid sectors are.

3

Irish compensation levels in these sectors are well below the average of other European countries – well below.

The Irish low-paid are ultra-low paid.

Some might argue that we need low wages so that our exports are/become/remain competitive. However, other small open economies have much higher wage levels than we do and it doesn’t seem to affect their export levels.

Further, in our main export sectors – chemicals/pharmaceuticals and the information & communication sector – our wages are at average European levels. These sectors haven’t been affected negatively.

The relationship between wages and competitiveness is not a crude reductionist equation.We pay a real cost for our low wage levels.

First, is the low level of tax revenues. Taxes on labour are higher than taxes on capital. Therefore, when the latter is privileged, tax revenues are not optimised.

Second, our business sector suffers from low levels of consumer income. This not only affects businesses that primarily sell into the domestic markets; it makes it difficult for domestic businesses to transition to export markets.

Moving into exports requires a considerable investment which higher sales revenue from domestic income can help finance.

Third, it affects workers’ living standards and especially those in sectors that are reliant on discretionary spend; less revenue coming into sectors like restaurants means less money that goes on pay.

So, yes, those lefties and their sweeping narrative appear to be on to something. Now we have to start debating how we write another narrative.

Growing wages to the European level – including both direct and social wages – is one of our main challenges. We need a strategy to make a fundamental shift from an economy reliant on low wages and low-paid sectors.

This goes beyond just increasing wages. It is about creating high-road employment and businesses that are focused on investment, R&D, re-skilling and innovation, rather than sweating labour.

The big question is: do we have the capitalists to do that?

And if we don’t, what do we do then?

Michael Taft is Research Officer with Unite the Union. His column appears here every Tuesday. He is author of the political economy blog, Unite’s Notes on the Front. Follow Michael on Twitter: @notesonthefront

28 thoughts on “The High Cost Of Low Wages

  1. Diarmuid

    Interesting, would be a little more clear if income taxes and other deductions were taken into account. Although most wont admit it, Ireland has one of the lowest levels of salary deductions in Western Europe. Having lived in Germany and Austria I remember take home pay was less than 50% of my gross salary. In Germany that can get close to 40%. Scandinavian countries even less. In exchange, it is true that these countries do provide excellent levels of cheap childcare and health services etc.
    But it is still unfair to only talk about gross salary.

    1. DubLoony

      Gross alaray is one, but deducations and the rate when various tax bands kick in also need to be considered.

    2. ,Anomanomanom

      Your joking right? Low deductions! My forced pension can be €300 a month alone. Then usc and tax. And that’s without the other stoppages.

      1. Rob_G

        Take a look at what income taxes are like in other western European countries; I think that you will find that Ireland doesn’t have it that bad.

        People often go on about the great social provision that they have in northern European countries, which is true – but these things don’t come cheap.

        1. whut

          ugh.. this fuppin guy .. ive never seen you comment on something i agree on. you’re like a lighter version of jonotti, although hes clearly trolling, youre just naturally aggrivating.

          yes. good public services dont come cheap. but those conutries have them. and manage to have lower tax as well. it is in existence. so its entirely possible.

          1. Rob_G

            “yes. good public services dont come cheap. but those conutries have them. and manage to have lower tax as well.”

            – name one

          2. Fact Checker

            Employer social insurance contributions (aka employers’ PRSI) are close to invisible. Most employees haven’t a clue how much they are, or that they even exist.

            Both the rate and the take are quite low in Ireland by comparative standards.

        2. Fact Checker

          Social contributions in Ireland are very favourable for the low-paid. who don’t pay very much of them.

          In-work benefits aren’t great (dental, medical) but you get a level of pension cover as a share of final salary that would be impossible in most European systems.

          For someone with a long career on high wages a flat-rate pension of €233.30 a week at the end is not a particularly good deal.

          All part of how Ireland has the most effective tax-and-transfer system in the OECD.

          1. Anne

            Social contributions in Ireland are very favourable for the low-paid. who don’t pay very much of them.

            All part of how Ireland has the most effective tax-and-transfer system in the OECD.

            It’s not that effective.. you can’t transfer anything from a zero rate of tax.. zippo, nadda.. not a bean being transferred to anyone but themselves.

            Your comment smacks of disdain for the poor. Progressive tax is based on ability to pay. The poor cannot pay what they do not have.

          2. Anne

            “who don’t pay very much of them.”

            How are low paid workers supposed to contribute more towards social contributions if they’re low paid.. which you’re happy about.

            You can’t have it all ways, you know.

        3. ,Anomanomanom

          I’d love to pay what they pay. If we got what they get. We would not get a better service. We would just pay more for crap services

      2. Diarmuid

        Funnily enough, in each country I have worked the locals complain about having the highest taxes/deductions in Europe!

  2. Fact Checker

    A nice article Michael. You are correct to point out that it is far too crude to walk simply from wage levels to competitiveness. Wages play a part, but maybe less than some would think. My own thinking on this has evolved over the years.

    Two small quibbles:
    GNI is a better denominator than GDP, but it is still not perfect. It is inflated by several per cent of ‘re-domcilied’ plc profits which are part of corporate income but have very little relation to real activity here. This has pushed down your chosen ratio a little in the last few years: https://www.esri.ie/publications/the-effect-of-re-domiciled-plcs-on-irish-output-measures-and-the-balance-of-payments/

    Second, and this more touches on last week’s piece, is that since 2012 average earnings per hour have been pretty flat. Hours worked have risen a little bit. However employment has risen more than anyone (even you I think) predicted at the time. There is a trade-off between average wages and employment levels at least in the short run. I am happy to see employment recovering so much, even if it is at the expense of average hourly wages.

    1. Anne

      I am happy to see employment recovering so much, even if it is at the expense of average hourly wages

      It makes us happy that you’re happy..

      There is a trade-off between average wages and employment levels at least in the short run

      I don’t buy your correlation there.. but what short run is that? We’ve been out of recession a while..

    2. MoyestWithExcitement

      “since 2012 average earnings per hour have been pretty flat. Hours worked have risen a little bit. However employment has risen more than anyone (even you I think) predicted at the time. There is a trade-off between average wages and employment levels”

      Since 2012 business owners have decided that the people who help them earn money should create even more money (longer hours) and recieve less. They just decided that. There’s no scientific forces at play here that nobody can do anything about.

  3. Anne

    Taxes on labour are higher than taxes on capital. Therefore, when the latter is privileged, tax revenues are not optimised

    I was suggesting that Frilly could write about this last week, instead of caravans or manners or brown mince meat.. but she can’t for confidential reasons. Brown mince meat however, not a bother.

    I’ve seen some investment schemes are 0.. zippo..

    How are a QIF and its investors taxed?

    Irish regulated funds, including QIFs, are exempt from Irish tax on
    their income and gains. Therefore, any rental income or capital
    gains derived from real estate or real estate related assets will not
    be subject to tax in Ireland
    http://www.davy.ie/binaries/content/assets/davypublic/fund-services/briefings/ireland-as-a-domicile-for-european-property-funds-web.pdf

    Privileged indeed.

  4. Tish Mahorey

    Fine Gael are the Irish Tories. They use the low paid as a broad tax base and keep them desperate so they’ll work for next to nothing. So companies can boost profits by pushing down wages instead of improving their product.

  5. Cloud9

    Oh God it’s Tuesday… Him again. I just love the graphs that are skewed to visually make his point stronger. The tool of a chancer!

    1. Anne

      They’re not skewed.. the range is normally defined as required.
      You could have it starting at 0 and going to 100, and where the lines are in relation to each other on that range won’t be as clear.

      Here –
      https://support.office.com/en-ie/article/Change-the-scale-of-the-vertical-value-axis-in-a-chart-0bca495a-d4b8-45ae-8819-b38372736146

      By default, Microsoft Office Excel determines the minimum and maximum scale values of the vertical (value) axis when you create a chart. However, you can customize the scale to better meet your needs. When the values that are plotted in the chart cover a very large range, you can also change the vertical (value) axis to a logarithmic scale (also known as log scale).

      To change the number at which the vertical (value) axis starts or ends, for the Minimum or Maximum option, click Fixed and then type a different number in the Minimum box or the Maximum box.

      1. Cloud9

        Thanks for that Anne. He did a good job customising it..

        Keep typing… Might get back to the point sometime..

        1. Anne

          He did customise it well…. That’s correct.

          Do you understand excel and line graphs?

          A distortion would be changing one of the values on the y axis.. there’s no distortion. Customised yes.

          The range is defined as to what’s the minimum and maximum value … The lines become minuscule if put on a scale of 0 to 100.. the values are all within the range there, squint harder if you have to.

  6. Richard Elfson

    Y axis distorsion as per usual. Makes a mockery of a serious subject. Charts need working on.

    1. Anne

      There’s no distortion .. the y axis goes from 30% to 60%.. as that’s the range everything on the x axis falls into.
      That’s normal for line graphs..

Comments are closed.