Public sector wage debate lacking rationality

It’s the silly season, and politicians are considering where to spend the break.

There is little to concern politicians, apart from banking scandals, banking meltdowns, Dáil expense scandals, rising unemployment, the lack of Irish membership of CERN, climate change induced extreme weather and the chances of getting a deal from the EU on our debt.

So, not unnaturally, commentators and politicians have begun murmuring that we should “revisit Croke Park”. And there is something dark and dense in the undergrowth of that statement.

Let’s recap: the Croke Park agreement, which has saved over €1.5bn in costs to date, in effect represented the final flowering of social partnership. Social partnership was started in a time of massive economic crisis so its not surprising that its apogee would be reached in similar times.

It guaranteed no further wage cuts for public sector employees in exchange for not just industrial peace but an impressive sounding set of changes to work practices and approaches with the aim of not just saving money but improving service.

This, let’s not forget, came after the 2009 pay cuts which averaged 7%. An all too tiresome mantra repeated in the “debate” is that while private sector wages have fallen public sector wages have not. This is incorrect, as for the most part the phenomena of “downward nominal wage rigidity” operates in the private sector — adjustments there have been mainly by reduction in headcount (unemployment) rather than wages or even hours worked. The latest (Q3 2011) CSO data show that across all sectors except two nominal wages in Q3 2011 were higher than Q1 2008.

The public sector wage bill in total is something of the order of €14bn. This is a very large amount of money and is coincidentally almost the same size as the borrowing requirement. In classic style what is called the fallacy of conjugation is applied to then suggest that “we are borrowing to pay the wages of public servants”, with the implied solution of not paying and thus not borrowing left dangling like an unwanted participle at the end of a sentence, like.

“Borrowing to keep the streets safe and the sick healed,” doesn’t have quite the same emotive punch and may suggest worrying Keynesian or even socialist tendencies.

We can and almost certainly must cut the wage bill, as we must cut all costs, including those in the sheltered private sectors from whence hail many of those crying for cuts in the public side. At the heart of the debate on public sector wages is a confusion about how to cut the bill.

We can do this in one of three ways: We can reduce headcount, we can reduce (again) the nominal wages of those employed or we can do both. In fact, headcount is being reduced. Since 2008 numbers have fallen by nearly 10%, with some public expenditure vote groups cut by nearly a third.

Cutting wage levels (again) will fall disproportionately on the lower paid, as that is where the larger numbers are. Cutting the nominal wage level seems to be the preferred option of those advocating a revisiting although it would be refreshingly honest if they simply came out and said “cut public wage levels”. But where? 60% of wages are paid to those earning less than €55k, 25% to those earning less than €35k. Meaningful cuts, say €3bn per annum, cannot realistically be done if we wish to exclude the lower paid from same.

In addition, there are problems never mentioned by advocates of “revisiting Croke Park”. The most glaring omission is the knock-on effects. Cutting wages reduces spending power. The largest single contribution to Irish national income is consumption, and massive shocks in wages to 300,000 consumers will reduce consumption further, thereby weakening more the economy.

Will we have to reduce the overall public sector pay bill? We will. Will this best be achieved by cutting nominal wage levels? Highly unlikely. Will the dreary code-worded dance continue absent a rational debate? Certainly.

* Brian Lucey is professor of finance at Trinity College Dublin



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