CSO survey shows that falling wages may make economy more competitive

 

ANALYSIS:THERE WAS a moment of sweet irony at yesterday’s press conference on the ESRI quarterly economic commentary when the realisation dawned that the CSO data on earnings and labour costs, released an hour earlier, had undermined their estimates.

Normally, one would regard this as unfortunate and commiserate with the affected party. History, however, ruled this out. Irish economists typically wait for the quarterly CSO national accounts before updating their growth forecasts. They have good reason to do so for the ground can shift radically.

For these reasons, economists typically wait until the CSO data appear and then frantically update their forecasts. We can expect a rake of them early in the new year.

Until recently, the ESRI made a point of issuing their forecasts on the morning of the CSO release, thereby ensuring that they garnered the lion’s share of the publicity. This happened repeatedly, so one presumed it was deliberate.

Having previously forecast that wage cuts would be widespread, the ESRI threw in the towel and based their latest forecasts on a 1 per cent reduction in wages this year.

The CSO, however, produced a new quarterly survey covering practically the whole economy for the first time. This showed that average weekly earnings did indeed fall by 1.1 per cent in the year to the second quarter of 2009, with the private sector down 3.1 per cent and the public sector up 1.3 per cent.

However, and this is the catch, both public and private sector figures need to be adjusted. The public sector adjustment is straightforward. When allowance is made for the pension levy which is really a wage cut, the CSO reckon that their adjusted position is minus 4-5 per cent.

The private sector adjustment is more complex. Because job losses are concentrated amongst lower-paid workers, the CSO sample shifts over time with relatively more higher-paid people being included. When this is allowed for, the CSO estimates that the actual fall in private sector wages is also in the 4–5 per cent range.

Public and private sector wage developments have tracked each other, and the rate of decline is much greater than the ESRI estimate.

This is the most positive piece of economic news to emerge in a while. While wages in our trading partners are rising at a 3 per cent clip, ours are falling at a 4 to 5 per cent rate. Another few years of this and we could make serious inroads into our competitiveness disadvantage.

The recent Budget wage cuts take effect on January 1st and average 5.6 per cent. We do not know what has happened to private sector wages since the second quarter, but it is worth noting that the decline was accelerating as the year progressed.

Public sector claims that they are being treated unfairly have taken a knock. If the trends revealed by the CSO continue, the two public sector wage cuts already introduced may do little more than match private sector developments over a two-year period.

The ESRI forecasts, though more optimistic than their previous ones, are broadly in line with those in the recent Budget.

They show that if you measure the fiscal stance in a simplified manner, the recent Budget was less contractionary than those in the 1980s and much less contractionary than the 1976 one when capital spending was slashed.

This reflects the fact that inflation is now negative. Take the most recent Budget.

All that happened was that current spending was cut by 4 - 6 per cent and capital by 16 per cent against a background of CPI falls of 5 per cent over the two years and very large reductions in tender prices.

One could argue that this was a neutral Budget which made little change to anybody’s real position.