What is Wrong with Irish Business?

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Waiter-carrying-serving-tray
Michael-Taft

From top: waiter carrying tray: Michael Taft

How can we generate economic wealth and create well-paying jobs if indigenous business is over-concentrated in the low paid hospitality and retail sectors?

Michael Taft writes:

Here is one part of a presentation I made to the Nevin Economic Research Institute’s Labour Market Conference held earlier this month in the University of Limerick.

This may seem a bit abstract; it certainly doesn’t seem as urgent as other issues such as health or housing. However, this has far-reaching implications for long-term economic growth, household prosperity, and business competitiveness.

There is a narrative about Irish indigenous enterprise (which I shall simply refer to as Irish business) which has been championed by many, notably Dr. Conor McCabe, that Irish business and capital has historically focused on the finance and property sectors, content to service foreign-owned capital but which has, with some exceptions, avoided the high-value added sectors upon which we could build a strong Irish export base.

The following adds to this analysis by analysing what market sectors Irish business is active in.
Market sectors exclude agriculture and ‘non-market’ service (e.g. public administration, health, education, recreation & leisure).

1

The chart (above) compares Ireland with the EU-15 and our peer group – other small open economies which, like us, have small domestic markets and are reliant on exports.

Irish business is a poor performer when it comes to manufacturing. Whereas one-in-five European workers in the indigenous sector are employed in manufacturing, it is only 10 percent here.

Unfortunately, the EU data is, so far, limited to the period between 2008 and 2012 so we are looking at many countries at the bottom of the business cycle, especially Ireland. Still, Irish manufacturing is weak.

Why should this matter – if we can excel in other sectors? Professor Ha-Joon Chang puts it this way:

‘. . . the manufacturing sector is still – and will always be – the main source of productivity growth and economic prosperity. It is a sector that is most open to the use of machines and chemical processes, which raises productivity. It is also where most research and development, which generates new technologies, is done.

Moreover . . . it raises productivity in other sectors, mainly because the services sector is using more advanced inputs produced in manufacturing– computers, fibre-optic cables, routers, GPS machines, more fuel-efficient cars, mechanised warehouses and so on. Knowledge-intensive services sell mostly to manufacturing firms, so their success depends on manufacturing success. ‘

Manufacturing’s contribution to the Irish economy is, per employee, considerable.

Using Forfas data – which is based on exporting companies – direct expenditure in the manufacturing sector (total wages plus Irish materials and services purchased) came to €170,000 per employee. In contrast, direct expenditure in the traded services sector was €93,000 per employee.

Manufacturing has an 83 percent higher impact in the economy per employee.
Unfortunately, the total size of the Irish manufacturing is small which limits this benefit.

However, there are other sectors where Ireland performs strongly – and these, unfortunately, are sectors which are low-wage and low value-added.

2

Irish levels far exceed the proportion in other European countries. Indeed, over 17 percent – or more than one-in-six – in Ireland are employed in hotels and restaurants.

While it is understandable that this sector would be higher than our peer group (such as Finland) given greater tourist numbers, there is an over-concentration in Ireland.

For instance, Spain, Greece and Italy all have higher levels of tourism as measured by nightly accommodation occupancy per capita, than Ireland (between 11 and 21 percent higher), they have between 9 and 12 percent of their total market employment in working in the hospitality sector.

Compare that to Ireland’s 17 percent.

This concentration in employment is mirrored in business investment. In the EU-15, investment in the combined hospitality and wholesale/retail sectors makes up 15 percent of total indigenous investment; in other SOE countries it makes 12 percent. In Ireland it makes up 20 percent (in 2008, it made up 25 percent).

Here’s a little factoid to chew on: in 2008, there was more Irish investment in the hospitality sector than in the manufacturing sector.

This raises important questions.

How can we generate economic wealth (e.g. value-added) if indigenous business is over-concentrated in the hospitality and retail sectors? How are we going to generate well-paying jobs, given these sectors are low-paid? How are we going to build a strong Irish export platform as distinct from the modern, foreign-sector?

It also raises questions regarding the Living Wage.

It is easier to introduce a Living Wage in an economy where the traditional low-paid sectors make up a smaller proportion of the indigenous sector; where any price rises can be absorbed by consumers working in higher-paid sectors such as manufacturing. It is harder when those low-paid sectors make up such a high proportion – approaching 50 percent – of total employment as it does in Ireland.

We hear a lot about Irish business – which is sometimes conflated with foreign-owned firms.

We hear claims that the indigenous needs better tax treatment (a corporate tax rate of 12.5 percent isn’t good enough? Employers’ social insurance at half the level of other EU countries isn’t good enough? ).

We read stories about Irish entrepreneurs.

What we don’t get is a fact-based analysis of the state of Irish business –that it is concentrated in low-paid, low-value added and – in the case of wholesale/retail – non-traded, or non-export, sectors.

Hopefully, the incoming Minister is aware of this flaw. Hopefully.

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

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87 thoughts on “What is Wrong with Irish Business?

  1. ForFecksSake

    The word factoid does not mean “little fact”. It means non-fact or pseudo-fact. Basically the wrong answer to a QI question that makes the screen flash.

    1. Dara

      ‘an item of unreliable information that is reported and repeated so often that it becomes accepted as fact.’

      Thats bloody irony Alanis.

    2. Robert

      I always understood it to mean “self contained nugget of novel information” – it doesn’t cast aspersion on the veracity of the information presented, but perhaps the utility or relevance. Googling I see that both definitions are supported.

      1. The Old Boy

        Only because the ill-informed herd has destroyed another perfectly useful and pithy word by pummeling it repeatedly with the steam hammer of misuse.

      2. ForFecksSake

        No it doesn’t. Allowing a word to also mean it’s opposite means it ceases to be useful at all.

        1. Robert

          All I can say is I’ve heard it in use going on 10 years and it’s never been used the way you say it is

  2. Jack Ascinine

    Getting a Minister to comprehend what this article is saying would be like watching a monkey f^€k a football. They can’t see past the end of the week, much less cause and effect.

  3. Rob_G

    On the one hand, Michael argues that we need to attract more manufacturing jobs here. I don’t think that anyone would have major disagreements with that; but then, in almost the same breath, he argues for increasing employers social insurance contributions. I imagine that the reason that we don’t have more manufacturing is that companies are choosing to set up other countries where the cost of employing workers is cheaper.

    1. ivan

      In fairness, he states that presently the rate of employers’ social insurance is half the level of other EU countries. I can understand that a family run hotel in a small town could do with having a low cost of employing a waiter for instance, but when it comes to decent manufacturing jobs in blue chip companies, if employers in other EU countries are willing to pay more employers’ social insurance (our rate is half the level, right?) then you’d think that they’d be willing to pay it here, wouldn’t you?

      In other words, if your analysis is correct, then why is there any manufacturing in other EU countries?

      1. Rob_G

        “In other words, if your analysis is correct, then why is there any manufacturing in other EU countries?”

        – Historical/cultural reasons (e.g. Renault factories in France, Volkwagen factories in Germany)
        – lower production costs due to lower salaries

        It cost a lot more to hire some Irish workers rather than say Polish workers as things stand; if Ireland is competing against Poland for FDI, making it even more expensive to hire Irish employees (by increasing employer PRSI) is probably the wrong way to go about it.

        1. MoyestWithExcitement

          “Historical/cultural reasons (e.g. Renault factories in France, Volkwagen factories in Germany)”

          You mean sentiment? Aren’t you contradicting yourself by implying these decisions hinge on cost of labour but then explaining away companies not doing that with sentiment?

    2. MoyestWithExcitement

      “I don’t think that anyone would have major disagreements with that; but then, in almost the same breath, he argues for increasing employers social insurance contributions.”

      In the same breath? You’re acting like asking employers to pay their fair share is contradictory to job creation. That kind of thinking is directly contributing to rising poverty levels.

      1. Rob_G

        Explain to me how making it more expensive for companies to hire additional workers will lead to job creation then, so.

        1. MoyestWithExcitement

          You’re assuming direct cost of labour is the only thing they look at. Except you also think sentiment comes into play? Explain that one.

          1. Rob_G

            I never implied that cost was the only factor considered, but it is a large consideration. I’m still not sure how your suggestion of increasing employer rates of PRSI will lead to job creation; would you care to outline how that might work?

          2. MoyestWithExcitement

            I never said it would lead to job creation. I took issue with your claim it would hinder it. You have yet to explain how that will happen.

          3. MoyestWithExcitement

            An advocacy group for employers are calling for a reduction in their costs without explaining how the costs are hindering them? OK then.

          4. Rob_G

            50 years ago, most manufactured goods in bought in shops in America were produced in America. These days, they are mostly produced in China. This is due to cheaper manufacturing costs in China (and the invention of the shipping container).

            – I am sure that you are aware of this, and understand this phenomenon, and are merely disagreeing with me for the sake of it.

          5. MoyestWithExcitement

            You realise we’re talking about a specific cost here and not the general idea of costs, right?

          6. Rob_G

            Yes; ‘costs generally’ are made up of various specific costs, the largest of which is often labour costs.

          7. MoyestWithExcitement

            So, again, how does requiring employers lay their fair share toward their employees wellbeing stop them from hiring people? Any examples of social insurance payments actually putting a company so far in the red they have to shut down or leave the country?

    3. DubLoony

      We need reasons for companies to set up here.
      Cheap consumer goods can be made in China, India. Hi-tech goods Korea, Germany and any number of other places. Lot of manufacturing is now automated by robots so quite possible that a place is opened but only employs a relatively small number of people.

      We don’t have a history of military manufacturing which is where a lot of US, UK companies come from.

      We do have medical devices, farm machinery, food & drink sector, 3D printing. We need to focus on new areas that no-one has or indigenous conditions not found elsewhere.

    4. ForFecksSake

      I don’t think he says we need to attract manufacturing. He says we need to increase manufacturing. Irish businesses can do things and employ more than foreign firms even if all we ever read about is FDI.

  4. Lordblessusandsaveus

    Ireland is just one big hot-desking building.

    The “Googles” as they call them could all be gone in a flash. Just like all the other industries which reached a point where it is cheaper to relocate.

    So we need Irish owned, Irish run long term sustainable businesses.

    1. DubLoony

      Not so easy to relocate knowledge based economy. There is a reason why so many software companies here, we produce and import IT workers. There is a level of talent that is not easy to replicate.

      Assembly type jobs are very easy to relocate, we’ve seen that happen.
      Ones that need more knowledge and skill are more difficult.

      Intel has been here for over 40 years. Its run by Irish management, chips are designed here and manufacturing is enormously expensive to set up and can’t be moved.
      Why here? No extreme weather, no hurricanes, no earthquakes, no volcanoes, politically stable. We’re Goldilocks. That is what we need to sell.

      1. ForFecksSake

        Manufacturing jobs are not just assembly jobs. They are engineering and design jobs. Much of the assembly may well be done by machines.

  5. Condescending nana

    breeding puppies, selling booze and levying extortionate rents, that’s Irish “entrepreneurs” in a nutshell.

  6. Fact Checker

    Irish manufacturing is a lost cause outside of agri-food. There is, was and never will be a culture of it. Distance from markets (western Europe) and exchange rate uncertainty with the UK don’t help. Bank finance is the only game in town and it is expensive compared to the rest of Europe for various reasons.

    There is plenty of potential for indigenous service exports and many Irish firms do very well (or get bought out) as finance and distance from markets are not a problem like they are with manufacturing.

    1. ForFecksSake

      Anyone who says there “never was and never will be” because of “culture” is a reactionary who should be ignored.

      1. Kieran NYC

        Yes. Out of all of us, it must be ‘Fact Checker’, who consistently posts reasoned comments with little apparent bias and with plenty of sources and salient facts, who is the reactionary.

        You just don’t like the points he is making.

        1. MoyestWithExcitement

          Lol. ‘This is a big jump in recipients of social welfare. It must be fraud.’ Yeah that’s unbiased and reasoned. It seems you can get gullible admirers if you take the time to post more than 2 paragraphs consistently.

  7. rob

    “How are we going to build a strong Irish export platform as distinct from the modern, foreign-sector?” – I’d love to know the answer to this Michael – do you have any?

  8. Robert

    Has any body noticed all the Eddie Stobart trucks on the road? English hauling companies cleaning up here because they have much smaller operating costs relative to Irish operators. Sean Bhean Bocht eating her young again.

    1. Fact Checker

      Many years ago I worked in what passed for the ‘logistics’ sector in Ireland (indigenous owned).

      The firm was badly run, did not use even rudimentary IT tools, suffered from chronic underinvestment, paid its workers a pittance and we returned in kind. The problem was that all of the competitors all did exactly the same.

      It has come as no surprise that UK firms have cleaned up in retail and increasingly transport. My guess is that there are far fewer workers (but better paid) and proper use of IT tools.

      1. Robert

        Right … Well how’s about my own counter-anecdote of working for a perfectly well run Irish hauliage business that had exhorbitant business costs compared to UK competitors? As if your anecdotal experience even justified stifling of indigenous businesses …

        1. Kieran NYC

          What were the exorbitant business costs, as a matter of interest? Would be interesting to hear specifics from the horses mouth, if possible :)

    2. Pip

      Seems almost all Stobart business here is for Tesco. Not known for great pay, despite the obvious responsibilities and skills required.

      1. Robert

        I’d say Stobart pay their drivers just fine – pity they’re not IE taxpayers though …

  9. They Tried To Make Me Go To Rehab

    It’s an excellent question I have frequently considered

    I think Michael must consider the socio-political dimension

    Colonial policies dictated that indigenous Irish industry other than the flax, linen and brewing and distilling industries were not tolerated for fear of competing with the mainland incumbents.

    As others note then Ireland has no manufacturing tradition (for example), no indigenous natural resources (other than wind and wave, and some hydro, and now Corrib gas, and we all know how hard that was to bring onshore) and therefore no national consensus on how to play to our strengths, other than the usual dominated by vested interests, e.g. property, farming, some of that finances aka money laundering stuff.

    I suppose we could always try and revive Waterford Crystal now that John Halligan is in the gubbermint.

      1. ivan

        As a matter of interest, and this isn’t typed with a snarky tone intended, are such jobs, in general, well paid?

        I ask this because in a previous life, where I sat on the credit committee of a credit union and we’d see applications come in, the wages paid in a local outfit weren’t much to write home about, and it was all 3 month temp contracts…

        1. DubLoony

          That is a whole other discussion.
          If we are saying that manufacturing jobs are generally better paid, then your experience would contradict that.
          It is possible that people are hired on temp contract to meet some seasonal demand?
          Or would all workers be on those contracts? If so, time to get the unions involved.

    1. Robert

      A good economics term here is “Extractive economy” – we have an economy set up to extract value for a colonial power – not much has changed but for the colonial bit …

  10. Clampers Outside!

    Ah, yes…. tourism and retail…. the Irish slave* labour market.

    *No, I’m not comparing them to real old world slaves. Mimimum wage is as good as slave labour in the modern world in my book. I’m looking at you Maragret Heffernan… Dunnes Stores in particular.

  11. Bruncvik

    Basically, the problem with manufacturing here is logistics. Why would anyone open factories for heavy/bulky items here, if they can do it for the same price in continental Europe and save a fortune on shipping? This is not something that Ireland can influence, and it’s not something that makes Ireland unique. There are plenty of regions, if not full countries, that suffer from the same problem (my wife is from a mountainous region with no roads wide or straight enough for large lorries, so economy is limited to service and hospitality). I believe the ideal solution would be precision manufacturing, such as medical/scientific devices, pharmaceuticals, etc, which don’t require large-scale shipping. Unfortunately, for that you’ll need highly skilled workforce. Do we educate such workforce here?

    1. DubLoony

      We have a huge pharma sector as well as medical devices. All shipped out of Shannon enterprise zone.

  12. Fact Checker

    PS: Irish firms pay low corporation tax and low employers’ PRSI. But they pay very high business rates (€1.5 billion or so).

    They are levied on the valuation of the premises (which is pretty 19th century) rather than turnover or profitability. It is not much of a burden for a pharma plant with output in the billions annually but it very much is for low-value added native manufacturing that needs a lot of factory space.

  13. Diddy

    Entry level wages for grads let alone unskilled haven’t moved in 15 years. If anything they have regressed.

    How many people are earning 30 grand? Lots. Again same as 10 years ago.

    What does 30 k buy u? Sweet fa

    It’s a race to the bottom in the whole western world

    1. DubLoony

      Bingo – that’s the real problem. Wages not keeping up with inflation or productivity.

    2. MoyestWithExcitement

      “It’s a race to the bottom in the whole western world”

      Amen. It’s a cultural problem though. We let it happen. See Luas drivers; public reaction to.

      1. DubLoony

        Am really stunned by the reaction.
        Many seem to accept that its ok to do a full time job but not be paid a decent wage for it. The acceptance of “Working Poor” is one that must rejected. you work, you get paid.

        1. MoyestWithExcitement

          There’s various reasons for it. Some are classist bigots who object to the idea of a working class person getting a decent wage. Some are petulant toddlers who are just whining that someone has something they don’t have. Whatever the reasons though, the effect is the same. We live in a culture that operates on supply side economics thinking; that business owners are the ones who create jobs and so must be put on a pedestal. The rest of us should be *grateful* to them. That is why Transdev have no problem engaging in a strike breaking strategy that people revolted against 100 years ago.

          1. MoyestWithExcitement

            I can’t really add to any of that. I guess what we should be discussing is how to break those myths. I swear to God, if I won the euro millions, I’d spend a load on media.

          2. Anne

            Love love love Bob Reich.. so much so that I donated to his next documentary.
            I have to thank you for linking to him here previously Dublooney… wasn’t aware of him prior to you mentioning his docu ‘Inequality for all’.

    3. curmudgeon

      Very true and goes hand in hand with the lack of unions. College graduates getting paid less than Luas drivers becuse they simply don’t have collective bargaining power, Jobbridge didnt help this either.

    4. Owen C

      This is categorically untrue. I joined a large bank graduate program in 2001. Was paid 21k per annum with 2k bonus after 12 months. Accountants and solicitors got less. We now have entry level Luas driver being paid 36k or so (after induction). The career path for professionals of course makes up for their low entry point, but please don’t peddle any nonsense that wages haven’t gone up in the last 15 years at the entry level side of skilled labour.

  14. john

    The Nevin Institute, hahaha might as well call it the communist propaganda institute. why do you waste our time with this one sided rubbish broadsheet? Mercile on Mondays and this guy on Tuesdays are you trying to have a daily left wing loon tirade now?

    1. Bonkers

      I see what you’ve done there.
      You’re unable to refute the facts and data of the article so the next best thing is to attack the source

      Nice try

    2. The Key of G

      Every time I see Nevin Insitute I think of itinerant boxers and homicidal Wicklow women

  15. Michael Taft

    Just to answer – in one comment – some of the responses. First, whatever problems we have in developing indigenous manufacturing, it isn’t wages. Compared to other small open economies which are reliant exports, Irish manufacturing wages are 23 percent below their average (€39.70 average per hour for Other SOE; €30.60 in Ireland). Most EU-15 countries have higher manufacturing wages. Only the UK, Italy, Spain, Portugal and Greece have lower wages.

    As well, wages make up approximately 15 percent of total costs in the manufacturing sector; so it’s a small factor regardless of the wage level.

    Second, we shouldn’t be pessimistic about the potential of indigenous manufacturing. The overwhelming majority of native manufacturing firms are outside the food sector, earning 2/3 of all value-added. It is a matter of building this up – as well as the food/drink sector.

    Third, there is no inconsistency with a strong enterprise sector and high employers’ social insurance – all the other small open economies have much higher PRSI levels and much stronger indigenous enterprise sectors. Employers’ PRSI, known as the social wage, could be increased as part of wage bargaining. It is part of employees’ compensation, after all, and not much different when workers in a firm bargain for increased benefits (health, pension) rather than direct wages.

    It is true that our peripheral location puts an extra burden on transporting manufactured goods. However, mullti-nationals do it. We need to compensate with scale and cooperative procurement.

    As to the solution? That’s the big question. Sean Lemass was banging his head against the wall for 30 years trying to develop the indigenous sector. There is no magic bullet. The first step, however, is to describe the problem and get it acknowledged and when it comes to the indigenous sector there is little of either.

  16. Fact Checker

    Michael – it’s a very interesting post as always.

    You are dead right on this. The issue is not on the labour cost side. It comes down to all sorts of ‘soft’ stuff like enterprise supports, training, etc.

    Unfortunately also manufacturing depends on agglomeration economies and Ireland for whatever reason has never really developed any indigenous ones. 40 years of making drugs and computer chips for MNCs hasn’t spilled over much into indigenous activity either.

    Thankfully it is easier to scale up on the services side. Ireland now home to multinational and indigenous service sector firms which are at the global productivity frontier. This is a very good thing for long-run Irish living standards.

    1. Bonkers

      Another factor has to be high energy costs for business in Ireland . It is very difficult for us to compete in manufacturing with countries like France and Finland awash with cheap energy from their nuclear power plants. Energy is a huge input to manufacturing and if other EU countries are producing it for a fraction of what we import it for then we’re already at an immediate disadvantage.

      1. Fact Checker

        Granted high energy costs are an issue in Ireland. They are partially a result of the policy mix pursued in recent years.

        But why does German manufacturing compete so well with France across the border? German electricity costs are much higher than French.

  17. Mulder

    Listen could we not just revert to type so to speak, back to the celtic tiger, era, i know, bad words, spit, but could not just go back to selling each other houses or other property.
    That be a growth sector.
    As for irish economy, computers, big corps and then agriculture, connected to agriculture and off shoots of agriculture.
    Ohh and services.
    Just looking at it, thats not too good.

  18. Andy

    – Tiny local market.
    – Limited track record of industrial activity – including making stuff, digging stuff out of the ground, process stuff dug out of the ground etc – the UK, Germans etc have been manufacturing, mining, processing, building stuff for centuries. While they were having their industrial revolutions we were picking spuds on half acre lots,
    – Virtually no venture capital industry. Lets all invest in bricks & mortar. It’s as safe as houses. You can take that to the Bank. Zing. The ironic think about this is we can’t even innovate in the construction sector as we’re still using blocks & reliant on subbies rather than large companies building with steel frames or off-site fabrication.
    – Planning delays/costs in building a factory/warehouse – Ireland permits take 150 days & cost 6% of the value compared with the UK where it takes 105 days and costs 1% of the value,
    – Many with ‘notions’ have shipped off to make their money in the UK or America.
    – No large government contracts to sustain private manufacturers – the US federal/State/City authorities share around their vehicle purchases between US car manufacturers.
    – No one in government has any track record of working for big business. In fact most of them have never spent much time, if any, in the private sector.

    Having said all that, we’re good at tax & financial services (not actual risk taking though) and we’re good at following processes put in place by Americans in factories designed & built by Americans.

    1. The Key of G

      Miserable cake hole.
      We’re world leaders in equine, blood stock, dairying and baby milk formula. Our butter is the envy of the world.

      1. Andy

        Mr Taft’s article was about non-Agri manufacturing.

        But insult noted and appreciated.

        Cake Hole,
        Senior VP of Miserableness

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