Workers’ Pay and the Economy

Joe Craig

3rd March 2002

The Irish Times last week reported on the latest earnings survey across Europe carried out by the Federation of European Employers:  ‘Despite fears of the effects of recent wage growth in Ireland, employees come only 14th in a new league table of earnings in 39 states…Irish pay levels match those in Spain while Greece and Portugal are the only EU member-states below the Republic.  Workers in the United Kingdom, our largest trading partner and competitor, have the joint fifth-highest earnings in Europe, along with the Netherlands.’

‘The figures are based on earnings at the beginning of this month.  Mr. Chater (director general of the federation) accepts they are not strictly comparable across countries.  They are based on pre-tax income and include other regular payments such as overtime, but not sales commission or profit/gain sharing schemes.

‘He said that while Irish wage rates had been increasing faster than in most European countries: “The Irish wage differential increase has been very short term, there is a lot of catching up to do and there is high inflation in Ireland as well.”  He said that much of the growth in Irish pay rates had been to high earners and specialised sectors.  “I suspect that the average factory worker has not done so well.”

For this observer the most shocking item in the Irish Times report was not the relative position of Irish earnings, which would come as no surprise to socialists in the country, but the level of earnings in Eastern Europe. ‘The average entry rate for British workers in the service sector is £4.54 (€7.41) per hour, compared with €5.97 in Ireland and €12.74 in Denmark. (first in the league).  The starting rate in Moldova and Russia, which tie at the bottom earnings league, is €0.13 an hour.”

What’s happened?

It is not that Irish workers have not increased their earnings over this period but their failure to make relative gains helps explain something about the Irish economy.  Gross Domestic Product grew by an average of 11% per year between 1991 and 2000 or by over 14% between 1995 and 2000.  This compares with results for the European Union (EU) as a whole of 4.9% and 4.7%.  (European Economy No. 72 2001, totals in national currencies, EU figures PPS weighted).

This unprecedented Irish growth is well known and Irish workers have indeed made gains: hourly earnings measured in the national currency have increased by 51% over the period 1991 to 2000 while in the UK the increase was 45% and only 34% for the Irish state’s main trading partners.  However this increase seems relatively less impressive when we measure from 1998, from which time the figures become 75%, 88% and 62% respectively.

When measured in a common currency they become even less so, from 1991 to 2000 the increase in hourly earnings was 51% for Irish workers, 71% for workers in the UK and 51% for those in the main trading partners.  (figures derived from Economic Review & Outlook, 2001).  Irish workers gains have been late and have been eroded by depreciation in the exchange rate which has fed into higher inflation.  A depreciating currency has been one under-noted means sustaining the booming economy, a means that reduces worker’s living standards.

Another factor must be introduced.  Irish workers’ productivity has increased, although Marxists must be sceptical of all such measures of productivity growth.  Nevertheless while average hourly earnings in manufacturing have increased from an index of 100 in 1990 to 176 (forecast) in 2002, increasing to only 157 for the state’s main trading partners, unit wage costs have declined from 100 in 1990 to 59 in 2002 (forecast) while increasing in the main trading partners to 112.

A trade weighted competitiveness indicator (a fall in the number indicates an improvement in competitiveness) records a move from 97.96 in April 1999 to 93 in July 2001.  At its lowest point it was 89.15 in October 2000 rising to 95.15 in January 2001. (Central Bank quarterly bulletin winter 2001).  In other words there has been no clear trend of worker’s pay demands destroying ‘Irish’ capital’s competitive position.

All this is despite a fall in unemployment from 171,600 (10.4%) in the third quarter of 1997 to 81,500 (4.7%) at the beginning of 2000.  In 2000 average unemployment was 4.2% while it averaged 8.3% in the EU as a whole.  What is remarkable is not that Irish workers have increased their wages but that they have been able to make so few gains,  to say nothing of its distribution, which is generally held to have become more unequal.

This has resulted in the much noted fall in the share of wages in the economy that outstrips every other country in the EU.  From 66.8% of GDP (at factor cost) wages declined to 54.1% in 2000 and are forecast to decline further in 2001and 2002 - to 53.3%.  In the UK the share was 73.8% in 2000.  On the other hand the index of profitability increased from 92.3 (for 1986-90) to 121.1 in 2000 for the EU as a whole and from 10.7.5 to 194.2 for the Irish state (European Economy).

A major part of this is accounted for by the profits of multinationals made elsewhere being attributed to Ireland but this is only testimony to the rip off of workers taking place both in Ireland and the US, where most of the multinationals are based.  It also confirms that economic growth in Ireland is incapable of equitable division.

That a fall in the wage share of the economy should continue while employment increased, from 1,221 thousand in April 1994 to 1,866 thousand in Jun-Aug 2001, an increase of over 665 thousand or nearly 55%, is a numerical measure of the political defeat suffered by the working class over the most recent period.  The contours of this defeat are covered in more detail in our soon to be published book on social partnership.

In the second part of this article we look more closely at the most recent opinions expressed by politicians and ‘experts’ that excessive wages have/will cause a fall in the economy’s competitiveness.