Monday Blog: Cheapness is not competitiveness

With the economic and political fallout from Brexit taking its toll voices have been raised – not surprisingly – to argue against wage increases in the Republic of Ireland. The recent National Economic Dialogue in Dublin was an occasion for such an argument with its proponents claiming to cite data on wage costs. Unfortunately, time did not permit a more careful consideration of the facts. Let me focus, in this blog, on two separate, but related, issues:

  • Hourly labour costs and how these compare internationally.
  • The national minimum wage in the Republic of Ireland and how it compares with similar countries

Many confuse the idea of ‘competitiveness’ with ‘cheapness’ (and some economists have not been immune from this tendency). The key driver of economic performance and its impact on living standards is ‘productivity’.  Productivity is about how much economic output in goods and services (including services and goods provided and consumed outside the market) can be generated for a given amount of labour, capital and other inputs. The quality of labour including its composition, skill and organisation is central to productivity. So also is the way enterprises are organised and run and a host of other factors including the ‘social wage’.  In considering alternative locations for financial services in post-Brexit London (or, perhaps, it should be referred to as likely pre-Brexit London) the Financial Times list of ‘cons’ under Dublin was like a roll call for a poor ‘social wage’ except of course the FT did not use that term.

In previous blogs I have drawn attention to the existence of two market economies in the Republic of Ireland – one which is extremely high-productivity, export oriented and labour-light; the other which is characterised by relatively low productivity and is more labour intensive. Typically, many in the latter fall into the heading of small and medium-sized enterprises. The historical context is complex. Investment is part of the story in so far small low-productivity businesses have not been noted for productive investment even during the years of rapid economic expansion prior to 2008.  In comparing wage costs as well as other costs we need to bear in mind this dual economy. Unfortunately, data are not readily available to compare these two broad sectors even though Eurostat data going back to 2008 has afforded some insight but only in comparing foreign owned and domestically owned enterprises (which are very poor proxies for the dual economy I have just been referring to).

A starting point is a comparison of labour costs for the economy of the Republic of Ireland as a whole (Chart 1). What do the data indicate? They show that the Republic of Ireland is well below similar large and small economies in northern and western Europe.  Given the wide variation in levels of economic development across the greatly expanded European Union of 28 member states it better to focus on the pre-accession member states (the EU15). In economic terms Greece and Portugal were, and are, economic outliers within this grouping.  Were all member states included the EU average would be 25.6 (EU28) compared to 30.7 (EU15) in 2015.  In 2015, the Republic of Ireland came 11 th out of 15 EU15 States in terms of nominal hourly labour costs (these averages refer to weighted arithmetic means). 

 

But, what about price differences between different countries? Denmark is much more expensive than the Republic of Ireland going by Eurostat price index data while Portugal is much cheaper (such comparisons reflect implicit GDP price differences rather than consumer ‘cost of living’ estimates). Even if a price adjustment is made the rank position of the Republic of Ireland is maintained in 2015 at 11 th place. There is some reshuffling of country ranks for other member state with the United Kingdom below the Republic of Ireland in 2015 (27.6 for the latter as against 24.7 for the UK).

The overall picture is that average labour costs are not unduly high in the Republic of Ireland compared to large and small Northern European economies.  But, it may be pointed out, what matters is labour costs in internationally traded sectors and, especially, some people will be quick to point out, in enterprises and sectors heavily reliant on exports to the UK market (such as food processing for example). One could also include retail, hospitality and tourism more broadly as these sectors compete for business among an increasingly mobile and price-conscious public.  NERI indicators published in our Quarterly Economic Facts last December indicate that the Republic of Ireland has lower average hourly labour costs than most other EU15 States across a range of sectors including: food, accommodation, retail and manufacturing. More recent data for 2015 confirms this position (see the Unite trade union publication: ‘ The Truth about Irish Wages - Ireland is a low waged economy Image removed.  ’). However, the Republic of Ireland did exceed the UK in these sectors, whether adjusting or not adjusting for price differences. Moreover, the data referred to 2011 and there have been significant fluctuations in the sterling-Euro exchange rate which impacts on nominal Euro amounts. There is concern that sterling could fall in value against the Euro in the coming months following the recent UK referendum. Were that to happen it would put pressure on the overall competitive position of exporters from the Republic of Ireland (although it could help exporting firms in the UK including Northern Ireland).  Two caveats, at least, are in order:

The path to competitive success on global markets is through an unrelenting focus on productivity, innovation, skills and organisational culture.  (Significant under-investment in productive capital and innovation has been a feature of some of the more traditional sectors)

While the UK will continue to be an important trading partner especially in particular sectors a balance needs to be struck in safeguarding cost structures and moving enterprises into a more globally diversified as well as high value-added end of economic activity. In other words, we cannot model ourselves on a low-wage, low-skill and low-productivity model of competition. As pointed out in a previous Monday Blog, countries that appear to be competitive going by various international indices of competitiveness are often high-skill, high-productivity, high-cost and high-tax countries (at least relative to the UK and the Republic of Ireland). Competitiveness does not equal cheapness.

The UK-Republic of Ireland comparison is also relevant in regards to the setting of the National Minimum Wage – a matter of likely ongoing controversy and research in both jurisdictions. The received ‘truth’ is that the Irish national minimum wage is ‘second highest’ in the EU. Not true.  To start with, data are only available for some EU states. Austria, Denmark, Sweden and Finland are not included because they do not have a statutory minimum wage.  These are countries with significantly smaller levels of low pay given the compressed nature of their wage structure and typically higher payroll taxes. Hence, it is highly likely that, comparing like with like, minimum wages and labour costs in these countries are higher than in the Republic of Ireland.

Second, when adjustment is made for purchasing power standard (the buying power of wages) the Republic of Ireland is 6 th out of 10 EU States for which data were available in the 2015/2016.

It may be objected that if this price adjustment were not made and, instead, the minimum wage was compared in nominal Euro currency values the Republic of Ireland would be second highest out of the 10 countries for which data were available. This, after all, is the cost confronting an international employer who might be considering location of an enterprise. Even if this argument is accepted there is another consideration that rarely gets an airing: the actual cost of employing labour at or just above the minimum statutory rate. In other words, employers have to pay social insurance or payroll taxes at different rates in the EU. It is difficult to estimate this cost precisely due to varying institutional arrangements for different situations and categories of workers. However, it is certain that in the Republic of Ireland employer social contributions are well below that prevailing in other jurisdictions including the United Kingdom (which itself is well below EU averages on this measure). One way to estimate this is the use the European Commission’s estimate of the ‘tax wedge’ which is composed of income tax paid by employees and social security contributions paid by employees and employers. The latter is estimated for different thresholds of annual earnings and, in the case of the Republic of Ireland, I have used the 50% of the median threshold at which point the European Commission has estimated an average effective employer contribution rate of 7.8%.  By contract, the corresponding figure for France is 23% and for Germany 16%. Chart 3 shows that on labour costs inclusive of employer social security contributions the Republic of Ireland comes 6 th out of 10 EU15 states for which data were available in 2015/16. Were the remaining 5 EU15 countries included in a like-by-like comparison the Republic of Ireland might have come 10 th out of 15 (ahead of Italy, the UK, Spain, Greece and Portugal in EU15 Club Med).

  While these comparisons are limited they suggest that the debate on wage costs in general, and low pay in particular, is ill informed at this time.

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Tom Healy


Tom Healy was the Director of the Nevin Economic Research Institute (NERI). Tom has previously worked in the Economic and Social Research Institute, the Northern Ireland Economic Research Centre, the Organisation for Economic Cooperation and Development, the National Economic and Social Forum and the Department of Education and Skills.