We must not allow wages drift upwards

It has been claimed on many occasions over recent years, and particularly in the banking inquiry, that nobody warned about what was going down in the economy in the build-up to the crisis. 

The clear impression has been created that policy makers were largely oblivious to the emerging risks.

This may have been the case for some of our policy makers and policy advisers, but not all. Progressively during the first eight years of the century, the National Competitiveness Council, which was set up in 1997 to advise the Government on key competitiveness issues facing the economy, and which comes under the umbrella of Forfás, warned about the evolution of cost competitiveness in the economy.

It showed that Ireland was rapidly moving up the EU league table on a whole range of costs, from labour, to professional services, to IT costs to local authority charges. In other words, the cost of doing business in Ireland was allowed spiral out of control and this in turn created a major vulnerability for the economy once the international shock hit in 2007.

The Central Bank measures Ireland’s cost competitiveness relative to those countries with which we trade, and it showed that between the middle of 2000 and the middle of 2008, Ireland lost close to 40% of its real international competitiveness. This is dramatic.

The fact was that during this period all of Ireland’s business costs were on a par with costs in some very unique European countries, such as Norway and Switzerland. Ireland could not justify such a cost base and the National Competitiveness Council recognised this fact very early on and warned progressively and consistently of the dangers and vulnerabilities emerging. Its warnings were totally ignored by respective governments and the rest is now history, albeit a very painful history.

Last week the council published its latest annual competitiveness report. While on the surface it makes for positive reading, some causes for concern are highlighted. In the IMD’s World Competitiveness Yearbook, which measures international competitiveness, Ireland has moved from 24th position in 2011 to 15th in 2015. According to the Central Bank’s real competitiveness indicator, Ireland’s international competitiveness has improved by over 22% between the middle of 2008 and the middle of 2015. While this is very positive, much of the improvement is due to the weakening of the euro against the dollar and sterling over the past year. This is very good news for Irish exporters of goods and services — but the worry is that it is due to factors that are totally outside our control. There is always the danger that at some stage in the future the euro will appreciate in value, and if the costs of doing business are allowed drift upwards, then Ireland could be faced with another competitiveness crisis.

Specifically, the National Competitiveness Council is warning that Ireland needs to “relentlessly pursue cost competitiveness in light of recent evidence that the cost of doing business in Ireland is once again on an upward trajectory.” In relation to labour costs it shows that gross wages in Ireland, which include wages, taxes on income and employer and employee social insurance contributions, are the eighth highest in the EU. While gross earnings are 8% below the EU average, net earnings are 11.6% above the average.

For many small businesses in particular, labour costs make up a significant part of total operating costs, so it is important to maintain tight control over wages in order to support employment creation. In this context, recent soundings about public sector pay increases and an increase in the minimum wage will inevitably exert upward pressure on all other wages in the system. For an economy that is so dependent on external trade and tourism, wages must not be allowed drift upwards. The latest unemployment data show that the downward trajectory in the unemployment rate has stalled at 9.7% and seasonally adjusted unemployment increased by 300 in July.

While this is not the end of the world, it does show that complacency cannot be allowed set in, in the relentless quest to achieve full employment.


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