Paying for inflation

Election economics: Wage growth in some sectors reached 20 per cent between 2002 and 2006, but most workers' only enjoyed modest real income gains, writes Paul Tansey.

In spite of the economy's robust rebound in 2002, most employees' purchasing power has only increased marginally thanks to a succession of price increases, something that may influence their voting behaviour when they go to the polls in a fortnight's time.

The majority of those who will vote in the forthcoming election are working for a living. Yet, despite the economy's robust rebound after 2002, real employee incomes have advanced only modestly during the current Government's term of office.

Taking account of cash additions to average weekly earnings between 2002 and 2006 and filtering out the effects of inflation, the real purchasing power of the weekly earnings of most Irish employees increased at an annual rate of between 0.6 per cent and 2.5 per cent over the four-year period.

Among the occupational groups surveyed, managers in manufacturing and skilled construction workers were found to have gained least in terms of purchasing power over the past four years, adding less than 1 per cent annually to their real incomes. At the other end of the scale, public sector workers and industrial workers in manufacturing saw their inflation-adjusted incomes rise by 2.5 per cent a year between 2002 and 2006.

The vast majority of employees - in banking and finance, distribution and business services - recorded annual real income gains of 1.3 - 1.8 per cent in the four years ending 2006.

Most voters are workers. In April 2006, total employment exceeded two million for the first time in modern Irish history. That same month, Ireland's population aged 15 - 64 years was estimated at 2.9 million. Thus, at April 2006, the 2.017 million people in employment stood equivalent to 70 per cent of the country's population of working age.

The material living standards of the vast majority of voters are determined by the purchasing power of their incomes from employment. Against a background of boom conditions in the economy since 2005, the relatively slow advances in the real incomes of most employees may well influence their voting behaviour when they go to the polls in a fortnight's time.

Changes in employee earnings over time reflect the interplay of an array of factors. These include: wage rises delivered under successive national pay agreements; "wage drift" due to excess demand in the labour market; overtime earnings; additions to income due to promotion or seniority, bonus payments and profit shares and, in the public sector, annual pay increments and relativity pay awards conferred by the first benchmarking agreement.

The total number of persons engaged in these sectors and occupations exceededd 1.5 million in 2006, thus representing some three-quarters of the State's total workforce. They can thus be taken as broadly indicative of the levels of employee earnings and changes in those earnings across the economy.

However, a number of caveats must be entered at the outset.

First, surveys of weekly earnings in both manufacturing and in construction are restricted to enterprises employing 10 or more people. Similarly, earnings data in the distribution and business services sectors are collected only for full-time employees working in enterprises employing five or more people. As a result, all of these surveys will tend to overstate the weekly earnings both of employees working in small businesses and of part-time workers.

The distribution and business services sectors are among the State's biggest employers, supporting a total workforce of 710,000 people in 2006, equivalent to more than one-third of all those at work in the State. Of these, almost 450,000 are full-time workers. The distribution sector comprises the motor trade, together with all wholesaling and retailing. The business services sector includes catering and accommodation; transport; real estate services; computing, posts and telecommunications and miscellaneous business services.

The second problem relates to the public sector. Public-sector earnings data covered an average public-sector workforce of 248,600 in 2006. These include civil servants; prison officers; members of both the defence forces and the Garda; employees in the education sector, local authority workers and those employed in commercial and non-commercial State-sponsored bodies.

The overtime component of the weekly earnings of both prison officers and the Garda is quite sizeable. For the public sector, earnings data are available only for the first three quarters of 2006, so that the figures understate average earnings for the whole of 2006. The public-sector data exclude the earnings of the additional 104,700 public-sector workers in the health service. Parenthetically, it is extraordinary that, in the midst of major disputes in the publicly-financed health service, there are no objective data on what medical consultants, doctors, nurses, administrators and ancillary workers actually earn.

Surveying the employee earnings data, it can be seen that industrial or shopfloor workers in the manufacturing industry were the lowest paid group in 2006. On average, they earned just over €600 a week last year, equivalent to an annual gross income of €31,300.

Employees in the distribution and business services sectors ranked next in the earnings hierarchy, with average annual earnings in excess of €35,000 in 2006. A further step up the income ladder, unskilled operatives in the building and construction sector earned an average of €39,000 last year.

Employees working in banking, insurance and building societies averaged earnings of just under €830 a week during 2006, equivalent to an annual income in excess of €43,000.

The average weekly earnings of employees in the public sector - excluding health workers - came in at just under €877 for the first three quarters of 2006, indicating annual gross incomes in excess of €45,600 last year.

The weekly earnings of public-sector employees were a short head behind skilled construction workers, who weighed in with average weekly earnings of €882 in 2006.

Of the sectors and occupational categories surveyed, the highest earnings reported in 2006 were for managerial staff - administrative, technical and managerial - in the manufacturing industry. They earned an average of €1,017 each week during 2006, equivalent to annual earnings of €52,900.

The growth in average weekly earnings over the four-year period 2002-2006 ranged from 15.7 per cent in the case of manufacturing managers and 16.2 per cent for skilled construction operatives to 24.7 per cent for public-sector workers and 24.6 per cent for shopfloor workers in manufacturing. In broad brush terms, other employees gained increases in weekly earnings of around 20 per cent over the four-year span.

On the surface, a gain of 15 - 25 per cent in average employee earnings - with the majority of workers in the middle of the range winning earnings increases of around 20 per cent - does not appear too shabby over a four-year stretch.

However, prices were also rising continuously through this four-year period. Between 2002 and 2006, the average level of prices facing consumers increased by 12.7 per cent. The net effect of such inflation was to confiscate the purchasing power of money wages.

Over the period 2002 to 2006 earnings gains won by workers evaporated to some extent in the face of rising prices. The increase in money wages between 2002 and 2006 is deflated by the 12.7 per cent inflation rate recorded over the period.

As a result, the vast majority of Irish employees managed to secure positive but relatively modest additions to their real incomes in each of the years 2002 through to 2006. On an average annual basis, these real gains in purchasing power ranged from 0.6 per cent for managers in manufacturing and 0.8 per cent for skilled construction workers to 2.5 per cent for public sector employees and industrial workers in manufacturing.

The median increase in real earnings averaged around 1.8 per cent a year over the four years to 2006, or about 7.5 per cent in total.

These solid but unspectacular additions to individual employees' real incomes over the years since 2002, even allowing for tax changes, are insufficient to explain the recent consumer boom. Between 2002 and 2006, aggregate real consumer spending in Ireland increased by 21.3 per cent, far ahead of the 7.5 per cent median increase in real personal employee incomes.

The missing link is provided by the scale of employment growth over the period. The numbers at work advanced from 1.777 million in 2002 to 2.039 million in 2006, a jobs gain of 14.7 per cent. Hence, large additions to employment, rather than rising real incomes of those already at work, have been the principal cause of the surge in consumer spending since 2002.

(In the final part of this series next week, the impact of budgetary and tax policy on the evolution of real disposable employee incomes since 2002 will be examined.)