One of the arguments for tax cuts is that it is necessary to boost people’s income, a type of rewarding the ‘wealth creators’.
Let’s leave aside the issues of whether tax cuts or social investment would be a better way to increase living standards. What is a more effective way of increasing people’s income from work?
Over the last four years the average employee has received a weekly wage increase of 8.9 percent, or approximately €4,000 for a full-time employee. In the last year, the increase was 3.8 percent, or €1,800. Without tax cuts, employees’ income is rising.
The problem, though, is that this is an average. Some sectors are growing faster than others; ditto with occupations and social class. Not everyone gets the average increase and many get more than the average, depending on market demand and other factors.
Driving employee income through wages would appear to be more socially equitable and economically efficient. Employees’ net income increases while the extra tax revenue can be used by the Government to invest in programmes that reduce living costs.
However, while tax cuts will increase employees’ net income, it will reduce the government’s capacity to invest, given the reduction in tax revenue.
Affordable childcare is one programme that would reduce living costs through lower fees; reduction of public transport fares is another. And then there’s a programme to build cost-rental housing which could substantially reduce rents.
These and other programmes would effectively boost people’s income though lowering costs. This is the benefit of linking income with wage increases.
But what would the economic impact be of rising wages?
Measuring the level of wages in the Irish economy is a challenge. It suffers from the same problems when using conventional national account data.
For instance, in other countries it is rather straight-forward to measure labour’s share in the economy. It is based on wages as a percentage of GDP.
But as we know, GDP is not reliable in Ireland. It is also becoming clear that using the CSO’s modified Gross National Income is not helpful when comparing with other countries, either. This is because the formula that the CSO uses cannot be applied to other countries.
There is another, little used measurement – Net National Income, or NNI. NNI essentially strips out capital depreciation in all countries.
It essentially measures the sum of all income – household, business and government income. The only tweaking of this measurement is to exclude the income re-domiciled companies, not something that would feature much in other countries.
When we use NNI, how does Irish labour’s share of national income compare to our peer group?
We don’t fare well. Ireland’s labour share of national income is well below that of the weighted average of our peer group in the EU. The only exception was during the recession but the ‘rise’ is misleading.
Between 2007 and 2011 employee compensation fell by 13 percent. But national income fell even more – by 20 percent.
What difference does this make?
In 2018, if Irish wages were to increase to our EU peer group average, it would mean an 11 percent increase for all Irish employees. It could also mean an increase of €6,500 for each employee (full-time equivalent).
This puts the demand for tax cuts into perspective. There is no tax cut that comes anywhere close to the amount employees would receive if they were paid at the level of our EU peer group average.
The counter-argument is that higher wages would make Ireland uncompetitive. However, our low-wage status (as defined by labour share) does not make us more ‘competitive’.
In our peer group Ireland ranks bottom – in both the global competitiveness ranking and labour share. It is not that there is a causal relation between a higher labour share and greater competitiveness; there isn’t. But equally, there is no causal relation between a low labour share and high competitiveness.
To drive wages does not require budgetary action. It requires new labour market institutions and practices; notably, collective bargaining at both firm level and across industries.
The main beneficiaries of collective bargaining are those with little economic leverage – the low paid, precarious workers, most women and non-nationals.
Collective bargaining raises the floor because by bargaining together employees can exercise greater industrial power (which is why employers don’t like it). However, without a legal right to collective bargaining, employees are at a considerable disadvantage.
There are wider economic implications of driving wages. For instance, if output doesn’t keep pace with wages or leads to a spike in imports, the economy can over-heat.
This requires a macro-economic strategy that is compatible with rising wages but seeks to promote output at the same time. In this regard, a wages strategy that is focused on the low-paid could help.
All this to say, we must find ways to reward the wealth creators – the men and women who produce the goods and services that we need or want to buy. Wages rising with productivity, wages rising with national income, wages rising for everyone – this is a way around the dangers that a Brexit-induced could bring us.
But more importantly, it is a way to ground the economy in a sustainable manner.
Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday.