Protectionism of sectors bad for economy, warns ESRI

Wed, Apr 18, 2012, 01:00

THE GOVERNMENT should resist any pressure from vested interests to ease competition law, according to an ESRI paper published today.

In Troubled times: What Role for Competition and Regulatory Policy?, the study argues that policymakers must not give in to demands to shelter some parts of the economy from market forces.

Such demands “typically arise in troubled times” it notes. Acquiescing would be likely to offer only transitory benefits, while delaying recovery by pushing up prices, thus damaging Ireland’s competitiveness and its ability to export.

Ultimately, that would slow economic recovery and the rate of growth in employment, the report concludes.

The study also finds that the process of evaluating the costs of new regulations in Ireland has “yet to fully reflect international best practice”.

A separate study on the labour market also published today, entitled Explaining Changes in Earnings and Labour Costs during the Recession, suggests that “there may be little to be gained from pursuing policies aimed at labour market deregulation, such as reducing the minimum wage and/or restricting bargaining arrangements [involving trade unions] within firms/industries, as such policies are unlikely to influence the wage-setting behaviour of firms”.

The report finds that companies overwhelmingly used layoffs to reduce their overall pay bills during the recession.

After staff cuts, the most common means of reducing overall labour costs was cutting the number of hours worked, followed by cutting additional payments, such as bonuses.

Fewer than 2 per cent of firms reduced basic wages, the report says, something that is in keeping with the experiences of other countries even during severe recessions. Economists have long noted that downward movements in nominal wages are very rare.

The authors find wage cuts were more likely in smaller firms, less capital-intensive firms and among lower-skilled workers.

In the period 2006-2009, the total number of active companies in the economy fell by just 1.1 per cent, according to the report. This, however, masks considerable differences across the economy.

In construction, the number of businesses fell by almost a quarter in the three years to 2009. By contrast, more companies were doing business in both industry and the retail sectors in 2009 than in 2006.

The rise in unemployment was therefore likely to be attributable to companies closing down in the construction sector and downsizing their workforces in other sectors.

Both papers will be presented at the ESRI’s fourth Economic Renewal conference this morning. They are also available at esri.ie