How is the economic recovery for you?

For those of us whose bedtime reading is the latest thriller from the Central Statistics Office, it has been clear for some time that the Irish economy is recovering. To judge by the employment data, Ireland turned the corner in the middle of 2012 and, since then, employment has risen continuously and unemployment has declined every month.

This sounds pretty good, yet the reality is that unemployment is still at more than 10 per cent and the recovery to date has only returned average real income per person to where it was in 2011, almost 9 per cent below its peak level. Real income per head peaked in 2009, the year after the crash, because the resultant fall in prices more than counterbalanced the initial fall in average incomes.

However, the standard of living in Ireland in 2008 and 2009 was unsustainable, founded as it was on a massive property bubble. Some readjustment in our standard of living was inevitable, though the fairness of the adjustment process continues to be an area of controversy.

Behind the changes since the jobs recovery began in 2012, there are a limited number of quite big winners (those who moved from unemployment into work) and a lot of small losers (those who already had a job).

The result of the crash in 2008 was that nearly everyone suffered a major loss of income. The graphic above* shows average real income per person, which reached its lowest point in 2013, almost 12 per cent below its peak level.

Big variations

Average figures can, however, mask big variations in how different groups and individuals fared. While many elderly people did relatively well, others, especially those who lost their jobs, suffered a much bigger loss of income. Thus, it is not a surprise that many people feel worse off; most of the population

are

actually worse off than they were when the bubble was about to burst in 2008.

Still, while remaining below their peak, real incomes are today back at the level they were in 2005, before the full excesses of the bubble years.

The change in real personal disposable income is made up of a number of components: changes in the numbers in employment, changes in income, changes in tax and changes in prices. Of these, the most significant factor has been the fall in the numbers employed. This has been particularly important, as those losing their jobs suffered a catastrophic loss of income. Employment today, while almost 100,000 higher than in 2012, is still more than 230,000 below its peak level.

In some areas of the private sector, such as hospitality and construction, nominal average earnings have fallen significantly since 2009, while in others, such as information and communications technology, average incomes are 10 per cent above their 2009 level.

Public sector pay

In the public sector, there were very significant pay cuts, leaving both average and hourly earnings in the public sector more than 6 per cent below what they were at their peak. In addition, a pension levy further reduced the net incomes of public servants relative to the average for the private sector. (Reductions in the price level have, to some extent, moderated the impact on living standards of these changes.)

The cut in public sector remuneration reflected the fact that, before the crisis, even allowing for education and experience, public sector workers were generally better paid than those in comparable employment in the private sector. However, while there was thus a strong logic to the public sector pay cuts, public sector workers suffered a much bigger decline in living standards than did most of those working in the private sector.

As the recovery progresses, it is to be hoped that the continuing flow of new jobs will gradually return the economy to full employment. This will simultaneously reduce the numbers in poverty and benefit the public finances. For most of those in employment, it is the substantial increase in the burden of taxation that leaves them worse off than before the crisis. This helps explain the pressures for cuts in taxation.

Long wait

The long wait for a rise in living standards for those in employment may be drawing to a close. The benefits of the fall in oil prices are already apparent and this will limit any erosion of living standards through inflation in the next two years.

While average wage rates in the private sector have remained fairly constant over the past six years, there are signs that this is beginning to change. In some sectors, shortages of skilled labour are developing, which will lead to upward pressure on wage rates in those sectors. It will probably be 2016 before there is a more general increase in wage rates, this time affecting public as well as private sector workers.

The likely increase next year will be small, commensurate with the continuing high level of unemployment. Nonetheless, when combined with low inflation, it will probably produce a small increase in living standards affecting much of the population.

The moderate improvement in the public finances provides only limited scope for tax cuts or expenditure increases in next year’s budget. Personally, I would prefer to see more of the very limited resources going into improving public services, such as early childhood education and therapy services for children with disabilities, rather than into cutting taxes. However, if there are to be tax cuts, these should be confined to taxes on labour – income tax, universal social charge and social insurance – as such cuts will have a bigger impact on employment than reducing other forms of taxation.

* Graphic: Real personal disposable income per head. Source: CSO National Income and Expenditure and ESRI Quarterly Economic Commentary