Despite the growth rises in GNP and GDP, and the falling unemployment rate, a feeling of recessionary ire remains. There is a disconnect in the economy, writes Tom O’Connor
The rate of growth was 7.8% in terms of GDP and 5.7% GNP last year — and GNP rose 1.3% in the first quarter this year. The economy has grown for each of the last three years. There has been a sharp drop in unemployment .
Yet so many people still feel as if the recession hasn’t gone away. The Samaritans is witnessing a large volume of calls from people who can’t make ends meet, while many businesses are busy paying back debt, still playing economic catch-up. There is no sense of economic euphoria among average workers and their families.
There are clear reasons for the disconnect between the strong national economic performance and the dearth of positive impact on workers and families. At the start of 2015, the median earnings (midpoint) for all workers in Ireland was €28,500, which included part-time workers. The median for full-time workers was €32,000 and the mean was €40,000. This average is artificially driven up by the large earners at the top, so the median is a more realistic measure.
Recent CSO figures show that in 2015 overall earnings rose by a mere 1% annually and actually fell back 0.3% in the first quarter, leaving the above figures almost intact.
The National Economic Research Institute (NERI) has shown that wages as a percentage of national income have declined. Wages have fallen from 65% of GDP in 1960 to 44% in 2015. Most of this fall has occurred since 2008: from 53% in 2008 to 44% in 2015. A 2015 study by the European Commission places Ireland third last of 39 economically developed countries, just ahead of Turkey and Mexico.
In 2014, Morgan Stanley reported that Ireland had the second-highest number of low-paid jobs in the developed world. Low pay is defined as less than two–thirds of median earnings. In Ireland, the low-pay threshold is €12.20 per hour. There are 400,000 workers earning less than this wage — that’s 30% of the workforce.
So, where is all the economic growth and money going?
Most of the money is going to what economists call ‘returns to capital’. In any economy, national income comes from a return to workers through wages or to capital. Returns to capital include a return on financial investments; profits to shareholders; or rent to those who own property.
What is happening increasingly in Ireland, the EU, and across the whole globe is that the return to capital is becoming voracious. That is why the share of wages in national income has been falling. The return to multinational capital by way of profits is highest in the world in Ireland; the monthly rent of houses has been rising inexorably in Cork and nationally; holders of wealth in Ireland have seen it rise significantly since 2009.
In 2014, Credit Suisse Bank reported that 41% of the Irish population had wealth between $100,000 and $1m and that Irish wealth was rising at the 14th fastest rate globally. The number of dollar millionaires had exceeded 90,000 in 2014 — up from 77,000 in 2013.
If we look at the distribution of income (what we get on a weekly or monthly basis) of employees in Ireland, many will be surprised to learn that: 400,000 people (26%) earn less than €15,000 per annum; and 425,000 (28%) earn between €15,000 and €30,000. In fact 62% of earners earn less than €35,000 per annum. Yet 10% of both employees and self-employed have incomes in excess of €70,000.
Yet the rent for an average home has risen to €1,000 per month, and €1,455 in Dublin. Many of the 62% of workers earning less than €35,000 haven’t had a pay increase in Ireland in 10 years, particularly those in the lower-paid jobs in distribution and transport.
In addition, any worthwhile package of health insurance in Ireland will cost €950 per month per individual. The fall in the numbers buying health insurance is indicative of straitened budgets. Yet, we know that the wait for cancer treatment can be up to 25 times longer for public patients. Low earnings, and being without a health policy, are literally a matter of life and death.
Yet Oxfam reports that US corporations have $1.4tn hidden offshore.
In Ireland, many of our biggest companies pay less than 6% of corporation tax — with Apple paying as little as 2%. Indeed it is costing the Irish taxpayer in excess of €300,000 to defend a case in favour of Apple at the European Commission for the Irish taxpayer to forego a repayment of €19bn in tax revenue!
So Irish people are badly paid and in increasingly straitened times economically. Thousands can’t pay mortgages and vulture funds are in the process of repossessing their homes.
Therein lies the problem: Vulture funds are owned and controlled by people who do not create wealth themselves; rather they speculate with capital to make more money. Globally, 62 billionaires, many based in the US, own more wealth than half the world’s population. But 74% of their wealth has not been created by them — it has been derived parasitically from others through investments in hedge funds, bonds, property, or shares in specific companies. This is the return to capital.
This is what is driving down wages in Ireland and globally. The seminal work of Prof Thomas Piketty has shown that this parasitic economic activity, known in economics as “rent seeking”, meaning unearned income, has increased dramatically in the past 40 years.
Piketty has shown the return on unearned income via capital has increasingly become greater than the capacity of workers and national income growth (g) in different economies to fund it. In simple terms, r > g. Because of this, wages have to fall to make up the difference, as capital accumulates a greater share of national income. The above figures on falling wages as percentage of national income demonstrate this clearly.
The rising cost of rents on workers in Ireland, now a low-wage economy, is further sucking workers dry to make further returns on capital. Thus, despite all the economic growth and employment, Irish people are worse off, economically and socially.
In order to redress this, there needs to be significant increases in wages across the whole economy. A co-ordinated EU and global crackdown on offshore companies needs to be conducted. A basic income equivalent to about €200 per week needs to be introduced for all adults, on top of which income can be supplemented and taxed. Large multinationals must be forced to pay their fair share of tax. Getting them all to pay 8% would net over €1bn for public services. Taxes on wealth and financial speculation also need to be introduced.
And this would only be a start.
Tom O’Connor is an economics and public policy lecturer, department of applied social studies, at Cork Institute of Technology
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