Competitiveness may turn out to be our most important economic issue, writes GARRET FITZGERALD
OUR SOCIETY currently faces three distinct but closely interconnected crises. Two of these – the banking crisis and the budgetary crisis – are widely recognised and, indeed, feature in the news almost every day.
However, what I want to write about today is the third of our crises, which I believe has the potential to pose a more long-term threat to our eventual recovery and which almost everyone has avoided discussing – our competitiveness crisis.
In the year 1999, average Irish earnings were 12 per cent lower than in the remainder of the 15-member EU. We were highly competitive, enjoying a growth rate unparalleled in Europe. This had been achieved through a trebling of the volume of exports during the previous eight years, which had led to an increase of 60,000 in manufacturing employment.
However, after 1999, under conditions of full employment, a burst of public spending hugely boosted prices and wages, with the result that Irish earnings rose by over one-half whereas in the other EU countries during those same years earnings increased by barely one-fifth. Thus by 2006 we were paying ourselves 10 per cent more than was the case with the rest of our 14 EU partners.
As a result, our export boom came to a shuddering halt. Between 2001 and 2006 the volume of Irish exports of goods rose by little more than 1 per cent a year – and fully one-half of the 60,000 newly-created jobs had disappeared.
By 2008 these inflationary policies had pushed our unit labour costs up 2½ times faster than in the rest of the EU, and almost four times faster than in our key euro zone competitors: Germany, France and Benelux.
None of this received publicity during those years. Politicians, the business community, the trade unions – and, most strikingly, the media – all refused to face this disastrous undermining of our capacity to compete.
And they also ignored the fact that this loss of competitiveness took place at the very time when the longer-term advantages of euro participation had led us to accept a necessary corollary of a single currency – the abandonment of the option to devalue with a view to offsetting the impact of inflation.
So far as I know we are unique in being the first state in modern times whose Government decided to ignore totally the discipline of membership of a single currency by pursuing a blatantly inflationary path despite the fact that the only possible way out of the mess thus created would be to adopt an equally unique solution: cutting the level of pay in the private sector.
Until this crisis broke nine months ago such pay cuts would have seemed an impossibility. During the past century pay rates almost everywhere have moved in one direction only – upwards. But now pay, in the Irish private sector, is actually falling.
For the moment there are no firm statistical data upon which to base an assessment of the scale of this phenomenon as data on private sector earnings takes time to collect, usually about three months.
Moreover, the CSO is currently in the process of revising and extending these particular statistical series, and the results of a new and much more comprehensive analysis of pay trends up to the second quarter of this year are to be published in September.
In the meantime, for guidance on the scale of pay cuts currently under way in the private sector, we are dependent on various sample surveys.
Last April a paper by Colm McCarthy reviewed a number of surveys that had been carried out by business organisations such as Ibec and Isme, and also took account of responses to a survey of 750 firms carried out by the Central Bank last March. Between them these surveys suggested that a net drop of 6 per cent to 7 per cent in private sector pay had already taken place at that time.
However, the estimates of current pay movements that our public authorities have furnished to the European Commission are more cautious, suggesting a drop in Irish unit labour costs of only 3 per cent to 4 per cent this year, with a carryover to next year that would involve a further similar amount.
Thus it seems that in this crisis private sector pay will fall by at least 7 per cent – and probably by more than that. By contrast, in the rest of the euro zone pay is still rising, and unit labour costs are expected to rise this year by around 4 per cent, levelling off next year.
If these projections are validated by events labour cost competitiveness in our private sector, relative to our euro zone partners, would by the end of next year have improved by at least 11 per cent – and possibly by somewhat more than that.
We are certainly not going to get back to the situation of 1997 when our pay costs were 10 per cent below those of our competitors, but there is at least a possibility that by the time a recovery in the markets to which we export leads to increased demand for the kind of goods that we produce, we might be approaching a level playing field in respect of our labour costs.
If by the end of this year there turns out to have been a significant reduction in private sector pay, this could raise the issue of whether further action might be needed in respect of pay in the public service.
In yesterday's Irish TimesJim O'Leary, who with two Maynooth colleagues established in 2004 that (full allowance having been made for factors such as differences in educational levels) public service pay in 2001 had already been 13 per cent higher than pay in the private sector, returned to this subject.
He pointed to last December’s ESRI paper which showed that, following two “benchmarkings”, this differential had risen to 24 per cent – even if one disregards the much better public sector pension arrangements and the benefit of greater employment security.
The recent public service pension levy somewhat reduced this public/private pay differential, but if private sector pay rates are cut significantly during the course of the current year the pay gap between these two parts of our economy could again be widened, which would raise questions of equity between those employed in these two sectors.