Honohan highlights falling income disparities

There was a 24% decrease in average income in the bottom 10% and a 6% increase in income in the top 10% of Irish society during 2009 and 2010, according to the governor of the Central Bank Patrick Honohan.

“While average income fell by roughly the same percentage in the intermediate deciles, the statistics show a remarkable disparity at the top and the bottom. The average income at the bottom decile fell by about 24% in 2009-10, while the top decile (10%) increased by about 6%. Wow.”

But he said the figures conceal underlying trends. There was a sharp increase — from 8% to 15% — in the number of unemployed people in the bottom 10% over this timeframe. These people would have seen a significant shift in living standards.

Moreover, there were far fewer “not economically active” people in the bottom 10%. This category, which mainly comprises retirees, fell from 81% to 57% over 2009 and 2010. “This warns us against thinking that the 24% fall in living standards actually applies to the people who started in the lowest decile.”

People in the top 10% had skills that became more in demand during the downturn, which explains the increase in earnings in this cohort.

Speaking to the Chartered Accountants Leinster Society October business lunch, Mr Honohan said there were many “false friends” in circulation about bank debt and mortgage arrears. “The very high and still growing rate of mortgage arrears is often identified with what could be an entirely distinct phenomenon, namely that of negative equity.

“In fact, when we drill down on the data, to the extent that we can, we find that the overlap between households in negative equity and households with mortgages in arrears is smaller than one might think. Most households with negative equity are current in their mortgages, while others are in arrears despite positive equity.”

Rather unemployment and loss of income were much more important determinants of mortgage arrears than negative equity. This has important implications for predicting mortgage arrears and loan losses and for designing bank policy to deal with the management of arrears, he added.

Moreover, Ireland’s loss of competitiveness for much of the last decade was distorted by the amount of workers employed by the construction sector. The economy seemed “super- competitive” in 1998, but there looked like what was an alarming loss of competitiveness in the years up to 2007.

Mr Honohan argues that the loss and improvement of competitiveness have been real phenomena. But even if there had been no change in productivity or labour unit cost over the past fifteen years, there would still have been a loss in competitiveness because of the surge in the number of construction workers in the labour force. Construction has much lower productivity rates than the rest of the economy, he added.

* Read more:

Resolving bank balance sheets is the way to move on

Banks in denial over arrears crisis, says finance watchdog

Honohan highlights falling income disparities