Reality check... cost of a job leaves no margin for profit that creates it

By Ivan Yates

Thursday, March 12, 2009

UNEMPLOYMENT has reached 354,000 and is rising at the rate of 1,000 per day. Brian Cowen told the Dáil it could exceed 450,000 by year end. All his estimates to date have been overly optimistic. The reality is that we face the prospect of more than half a million jobless.

The rhetoric of official Ireland about unemployment is becoming predictable and tiresome. They emptily empathise and prioritise "jobs, jobs, jobs" as the key policy and political objective.

At local level ashen-faced politicians and trade union leaders support delegations of former workers. They meet with receivers and liquidators to preserve residual jobs and seek compensation packages.

We need to get real about jobs. As an employer of 300 people I have to face a reality the Government can’t seem to grasp. Employers are entrepreneurs and base their enterprise on commercial opportunity. Jobs are a by product of their creativity, investment and activity. Job creation is a means to an end. That end is profit. Underlying every jobs announcement is the requirement for productive, efficient work to be done at low cost.

The trade-off between jobs and pay costs is misunderstood. Every employer, across the entire range of commerce, is shedding jobs. Why? They are trying to reduce the costs of their products and services. This is consequent on a decline in consumption, a fall in prices and a reduction in margins.

If they don’t cut payroll costs they will be unprofitable. If they trade unprofitably for a sustained period, they will run out of cash. When they can’t pay their bills their endgame options are voluntary closure, examinership or liquidation — take your unenviable pick.

These pressures are worsening. Each week there are record company failures and daily rationalisation announcements. This will deteriorate over the next two years. Faced with this unemployment nightmare, our leaders need to reduce the cost of employment. But what do they do? The April budget is forecast to increase income tax at the standard and marginal rates by 2% and introduce a new top rate.

One of the enduring lessons of the 1980s was an understanding about the "tax wedge". Taxes on labour and work add to payroll costs. The difference between gross pay and net pay is termed the "tax wedge". Reality check — who pays PAYE/PRSI every month to the revenue commissioners? Employers. Where are they going to get this extra cash?

At the first opportunity the Government is going to further penalise the cost of work. This will further decimate employment. Well done, lads. I like your priorities. Some labour intensive sectors of the economy are under enormous pressure to survive — hotels, retailing and catering are good examples. Many immigrants work therein at the lowest cost. We introduced the minimum wage in 2000 and it currently stands at e8.65 per hour.

Ireland is out of line with the minimum wage system elsewhere. Scandinavian countries, which are supposed to be the role model for us, have no minimum wage. Norway, Sweden, Finland and Denmark are among the nine EU states that have not put this in place.

Large economies like Germany, Austria and Italy also have no minimum wage restriction. Ireland has the second highest minimum wage in the EU. Only France, at e8.71 per hour, is higher.

Among other developed economies we are also out of line. Japan has no minimum wage. New Zealand’s rate is equivalent to e4.78 and in the US it’s $6.55.

While I’m not advocating dismantling our national minimum wage I remain to be convinced there should be such a differential between our rate and that of the British at £5.52 per hour. We can convince ourselves this does not matter. However, our view is secondary to that of every global boardroom.

Over the golden decade of the Celtic Tiger, the Government imposed significant additional regulatory conditions on employment. Individually, each measure can be justified. Collectively, they have made employing people in Ireland a bureaucratic quagmire.

We have the Equality Agency, Labour Court and the National Employment Rights Authority (NERA).

Anecdotes abound from employers about the pursuit of this legislation. I’ve heard stories of NERA inspectors enquiring about statutory "tea breaks" for staff. Some inspectors’ attitude is the greatest deterrent to being an employer. Paid maternity and paternity leave and disciplinary procedures (even in cases of blatant fraud) are among the legal employment obligations. We have fostered a culture of employment rights compliance.

Adherence to statistical questionnaires for the CSO has become a full-time job of form-filling — without any economic return. A balance needs to be struck between optimal employment terms and bureaucratic burdens so onerous as to undermine employment.

Ireland can only live off the goods and services we sell to the rest of the world. No one owes us a living. Competitiveness has been eroded. We have announcements of industries relocating to Poland and eastern Europe. More disturbingly we have recently lost out in job rationalisation to plants in Britain and other parts of the higher cost eurozone. ICTU believes companies should pay the 6% pay deal over the current 20-month period.

Given this attitude, some convincing is required to believe the ESB group of unions gives a damn about unemployment. The jury is out on our teachers. After the global recession ends, mobile multinational investment will operate on a different basis. The accepted notion that employers can afford private pension schemes may not survive. Private sector pension funds have a shortfall of e30bn here. This is mostly due to the collapse in equity and share prices. A new era could emerge where defined benefit pensions are an unaffordable cost of sustaining a job. State pensions may have to suffice.

GLOBAL rather than EU conditions will prevail. Every government in Europe has stated that its employment policy is based on high skill, high-earning jobs. The focus is on the upper end of the value chain. They cannot compete with low-cost China and India. We are all chasing a limited jobs market. Our tax rates and education levels have been sufficiently competitive heretofore. The dynamics of job creation will radically alter. We need to alter — now — in order to cope with that radical change.

The painful reality is that those in authority aren’t obliged to care about the unemployed. Forgive my cynicism, but the fact is that those at the top, first and foremost, look after those who keep them there.

The long-term unemployed don’t vote. Only those at work and unionised pay their dues. IBEC primarily represents big business that is often insulated (eg, banks, semi-state companies and large plcs).

Our leaders may recoil in horror at any suggestion of indifference to the jobless. The rhetoric is not matched by deeds. If we genuinely put employment at the top of the agenda, we will re-examine regulation of the labour market and the cost of work.

Don’t hold your breath because it ain’t going to happen soon. Vested interests will continue to rule OK.

This appeared in the printed version of the Irish Examiner Thursday, March 12, 2009