Council warns on high wage costs

Wage costs have been rising faster in Ireland than in competitor countries and have contributed to job losses in the manufacturing and high-tech sectors, according to the National Economic and Social Council (NESC).

In a review of the economy, NESC suggested that other sectors of the economy managed to sustain competitiveness despite higher wages through rising productivity.

Average earnings in the manufacturing sector have grown at a faster rate than our trading partners since 1997. The weakening of the Irish pound and the euro meant that labour costs expressed in common currency terms continued to fall up to 2000. After that, however, earnings in Ireland continued to grow faster than in competing economies.

"The net effect of movements in labour costs and exchange rates was that from 1997 to 2003 there was an increase in labour costs in Ireland in common currency terms relative to Ireland's trading partners of around 18 per cent," according to NESC.

Its analysis states that the nominal growth in earnings in Ireland in the years since 2001 has been faster than in any other EU state, with an annual average increase of 7.1 per cent over the years 2001 to 2003.

Earnings growth slowed over this period but the increase in 2003 at 5.5 per cent was still the highest in the EU.

It suggests that Ireland's higher wage rate growth is partly a reflection of a higher rate of inflation, which was the highest in the EU up until recently.

Nonetheless, it added that real earnings growth in Ireland has also been among the highest in the EU in recent years.

"Between 2000 and 2003, the average real increase in gross earnings in Ireland was 2.8 per cent, more than double the EU average and several times the average growth in real earnings in the euro-area."

The report added that the UK had the fastest growth in real earnings with real annual growth of 3.7 per cent over this period.

Employment in the manufacturing sector peaked in the first quarter of 2001 but has fallen by more than 29,000, or 12 per cent, in the period to the end of 2003. The report notes that the loss of employment has been disproportionately concentrated in the modern sectors.

Employment in optical and electrical equipment fell by 19,000, or by more than one quarter over this period. Job numbers in recorded media, which includes some software activity, fell by 2,700, or 13.7 per cent.

Together these high-tech sectors were responsible for almost 22,000 or three quarters of the approximately 29,000 job losses that occurred.

At the end of 2003, the level of employment in these sectors was 70,000, or 31 per cent of manufacturing employment.

NESC states that from 1987 to 2003, the cumulative increase in take home pay for a single person on average industrial earnings was around 67 per cent. Tax reductions contributed significantly to this increase.

A single person on average industrial earnings had a real increase in take home pay of almost 2 per cent in 2002 and close to 3 per cent in 2003.

NESC suggests that lower inflation should ensure a further increase in take home pay this year.