Irish Political Economy, class 7: Strategies for Wage-Led Growth

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Information about Irish Political Economy, class 7: Strategies for Wage-Led Growth

Published on March 19, 2014

Author: conormccabe



Presentation by Michael Taft of Unite the Union on strategies for wage-led growth.


Definition of Employee Compensation • Employee Compensation: comprises 2 payments: • (i) Direct wage – paid by the employer to the employee. That’s our ‘pay packet’. • (ii) Social wage – paid by the employer to a social insurance fund. From this fund employees consume goods/services for free or at below-market prices; and is provided income supports. • Examples: health care, pay-related unemployment benefit, pay-related social insurance pensions, maternity/paternity benefits, etc. • A low social wage = low public services and social protection; workers have to purchase goods and services on the private market and / or full-market prices (e.g. Ireland).

DealingWith Some Wage Myths: We Paid Ourselves Too Much 15.00 17.00 19.00 21.00 23.00 25.00 27.00 29.00 31.00 33.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Employee Compensation Market Economy: 2000 - 2010 (€ per hour) Ireland Other EU-15 Other EU-15 not in Bailout SOE

Priorto the crashwageswerechasinginflation. When living standards andcurrency movements are factored in, Irish compensationnever reachedthe EU averages. 10.00 12.00 14.00 16.00 18.00 20.00 22.00 24.00 26.00 28.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Employee Compensation Market Economy 2000 - 2010 (PPP per hour) Ireland Other EU-15 Other EU-15 Not in Bailout SOE

WageMyths: WeALL Paid Ourselves Too Much. Duringthe latter part of the asset bubble,increased direct income (income from work)wasmostly concentratedin the top 10%. This seems counter-intuitive. 87 373 301 -74 -438 -579 -310 420 1,134 4,938 576 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th State Average Annual Real Increases in Direct Income by Decile: 2003 - 2008 (€)

For middle income groups, social transfers compensatedfor the fall in directincome. The ‘squeezedmiddle’washeavily reliant on social protection payments. 602 629 777 859 1,172 1,207 1,100 646 365 191 755 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th State Average Annual Real Increase Social Transfers: 2003 - 2008 (€)

The Squeezed Middle • The average weekly income in 2013 was approximately €688 per week, or €35,800. • However, averages can be skewered by a few high- income earners • Better to look at median wages. Data is not very current or detailed but we can make some estimates. • How much does the ‘squeezed middle’ earn? • The middle 60% of PAYE employees earn between €11,750 and €51,200. And over half of this squeezed middle earns less than €30,000.

Nearly 2/3 of all PAYE employees earn less than the average wage. 36.6 54.9 63.4 78.7 €20,000 or Less €30,000 or Less €35,800 or less €50,000 or less Distribution of Income Earners: 2010 (%)

The CSO showsa substantiallevel of deprivation among middle decile groups. 36.4 46.8 36.4 31.5 26.2 18.6 15.5 7.1 4.8 1.6 22.5 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th State CSO Deprivation Rate by Equivalised Decile Group 2010 (%)

The CSO also showshighlevels of deprivation among householdswithincome from work • We usually associate deprivation with households without work income (e.g. unemployed, single parents, disabled, etc.). • However, there are high levels of deprivation among households where there are people working. 27.5 10.8 9.9 1 Person Working 2 Persons Working 3+ Persons Working CSO Deprivation Rate in Households with at Least 1 Person Working: 2011 (%)

Labour Share of Value-Added • Wages and profits are paid out of Gross Value-Added (GVA). GVA is equal to sales minus non-labour costs (e.g. rent, utilities, goods and services, etc.). • When GVA grows, both wages and profits may rise. • However, the split between profits and wages at any point is zero-sum. The greater the share going to profits, the lower the share going to wages (and vice-versa). • This is normally a straight-forward measurement. However, given the distortions in the Irish economy caused by MNC accounting activities, we have to attempt adjustments. A considerable level of profits declared in Ireland were generated in other economies.

Irish productivity is slightly above the average of other EU-15 countries. 43.77 42.18 42.03 41.35 40.94 40.51 37.87 36.80 36.70 36.61 35.61 33.14 32.95 31.95 23.00 20.82 Belgium Netherlands France Germany Ireland Denmark Austria Ireland Adjusted Spain Sweden Average Italy Finland UK Greece Portugal Value-Added per hour worked: 2014 (PPP)

Irish WageShare of CorporateValueAdded is extremely low byEU-15standards. In 2014, were Irishwageshare to reach the average of otherEU-15countries,it wouldmean anextra €10 billion in wages– or over €5,000 per employee. 35.0% 40.0% 45.0% 50.0% 55.0% 60.0% 65.0% 2003 2005 2007 2009 2011 2013 2015 Wage Share of Corporate Value Added 2002 - 2015 (%) Average Other EU-15 Ireland Ireland Adjusted

ThePlanet is Wage-Led: All this leads to us to the reasonableconclusionthat wageincreases are necessary, affordableand desirable. There are upsides and downsidesto wageincreases. Upsides • Benefits workers • Increases demand (especially when directed at low-paid) which drives growth • Prompts business investment • Increases tax revenue • Reduces public spending (where increased demand leads to increased employment) • Reduces cost of income supports (e.g. FIS) Downsides • Increases imports, reducing net exports – impacts negatively on growth • Impacts negatively on business investment • Increases inflation • Can increase public spending (e.g. public sector workers) • Creates ‘free-riders’ (where organised workplaces are disadvantaged vis-à-vis non- organised workplaces) • Can reduce competitiveness (in the export sector)

The Planet is Wage-Led: the ILO Study • The ILO conducted a major series of studies on the impact of wage increases (increasing the labour share). • They found that increasing the labour share produces a rise in GDP (a .25 multiplier). While net exports / investment falls – consumption increase compensates. • Conversely, they found increasing the profit share lowers GDP • BUT: a sting in the tail: for small open economies increasing labour share results in falling GDP. This is because net exports are reduced but the domestic market is too small to take advantage of increased consumption. • In fact, the problem could be worse for Ireland which has a higher level of imports for private consumption (20 percent as opposed to 10 to 13 percent for other SOEs. • HOWEVER: this is a static analysis and takes no account of rising productivity.

Issues regarding wage-led growth theory • There are two issues which we should be aware of: • First, political: wage-led growth can be convenient for some Government Ministers because it is something that other agencies should do (private sector business). Similar to hearing demands on banks to write-off debt. It removes the issue from political action. • Second, wage-led growth can lead us to believe the crisis is one of aggregate demand – rather than it being a crisis of finance capital, privatisation of credit and chronic under-investment. Increasing the labour share will have positive benefits globally (or on a European level) but unless we deal with the fundamental flaws, we will remain stuck in an unequal stagnating economy.

Wage-ledGrowth: Irish Issues • We must integrate wage-led growth proposals into a larger analysis of the Irish economy: • The privileging of finance capital over productive investment • The under-performance of the indigenous enterprise sector – with low value-added activity • The historical investment flaw – high corporate profits but low corporate investment (a feature of a tax-haven economy)

AWage-Led Strategy Must Go Beyond Just Wages • A poor indigenous enterprise base in the productive sectors means a lower level of consumption recirculated in the domestic economy. A wage-led strategy will be more successful if accompanied by a progressive enterprise strategy that seeks to break with the current tax-haven/FDI dominated policies – a strategy that builds a more sustainable export base and can provide import substitution. • Need for higher value-added economic activity where wages make up less a proportion of costs, turnover, etc. Low-value added activities cannot generate high incomes. However, the Irish indigenous sector compares poorly with other SOEs.

Arguments for a Wage-Led Strategy Must Go Beyond Just Wages 19,892 17,132 15,574 15,394 11,818 Denmark Austria Finland Sweden Ireland Indigenous Enterprise Value-Added per capita excluding construction (working age population): 2009 (€) 14.3% 11.7% 11.4% 10.9% 9.7% 5.5% Finland Sweden Austria Denmark Belgium Ireland Indigenous Manufacturing Employment as a % of Total Employment

The historicalflaw in corporate investment: Irish profits take a far higher proportion of corporate GVAthan the Eurozone. Corporate investment, however, is lower. 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Corporate Profit and Investment as a % of GVA: 2002 - 2012 Ireland - Profit EU-15 - Profit Ireland - Investment EU-15 - Investment

Startingthe arguments over wage-led growth • We don’t have to wait until we resolve the issues of finance capital, poor indigenous enterprise and the historical investment flaw. There are a number of indicators that show that we can commence wage-led strategies immediately. • First, NERI has argued that since the balance-of- payments (essentially our ledger book with the rest of the world) is strongly positive – this will facilitate wage increases. • Currently our balance-of-payments in is surplus. We take in €11 billion more than we pay out to the rest of the world. This provides substantial scope for wage growth without affecting our balance with the rest of the world.

Arguments for a Wage-Led Strategy • Second, employee compensation are low by EU-15 standards. In 2011, Irish employee compensation would need to rise by over 14 percent to reach the average of other EU- 15 countries. 39.61 39.28 38.65 34.26 33.68 31.29 30.10 29.86 29.06 28.56 26.19 24.57 20.80 18.95 15.88 12.25 Denmark Sweden Belgium France Luxembourg Netherlands Germany Finland Austria AVERAGE Italy Ireland Spain UK Greece Portugal Employee Compensation in Business Economy: 2011 (€)

Arguments for a Wage-Led Strategy • Third, wage increases can also come via the social wage and increased social protection. This means workers’ net income rises as expenditure is ‘socialised’. Affordable childcare, free GP care and prescription medicine, fully free education, increased subsidies to public transport, etc. • Fourth, labour costs in Ireland make up a smaller proportion of total operating costs in economy. 33.2% 32.6% 31.7% 30.4% 29.8% 28.7% 27.4% 24.4% 22.4% 20.6% UK France Sweden Germany Average - Other Countries Austria Greece Belgium Ireland (adjusted) Ireland Employee Compensation as a % of Total Operating Costs: 2010

Arguments for a Wage-Led Strategy • Fifth, though wages have stagnated over the two years, some groups have seen their incomes rise considerably. Disproportionate increases to higher income levels are economically damaging (higher savings, less spending, import-dense). 5.3 -4.9 -7.2 Managers, professionals and associated professionalsClerical, sales and service employeesProduction, transport, craft and other manual Increase in Weekly Earnings: 2011 -2013 Q3 (%)

Arguments for a Wage-Led Strategy: Finally,westill have a long waysto go before wereach employee compensationlevels in other SOEs whileour productivity levels are mid-range. 39.61 39.28 38.65 35.29 29.86 29.06 24.57 Denmark Sweden Belgium Average Other SOEs Finland Austria Ireland Employee Compensation in Market Economy: 2011 (€ per hour) 41.97 41.27 39.01 37.16 36.73 36.49 35.98 32.34 Belgium Ireland Denmark Average Other SOEs Ireland (adjusted) Sweden Austria Finland Productivity: Value-Added per hour 2011 (PPP)

All argumentsfor sustainablewage-ledgrowth lead to greater socialisation of the economy. • So we don’t have to wait to resolve potential problems in wage- led strategies for a small open economy. Besides, other SOEs have much higher levels of employee compensation. But a long-term sustainable wage-led strategy involves greater socialisation of the Irish economy: 1) Socialisation of the value-added through higher labour share 2) Socialisation of our credit functions (through public banking, stronger regulation of banking and credit, etc.) 3) Socialisation of goods and services through a higher social wage (increasing markets for health, pensions, education and income supports). 4) Socialisation of investment – the great lesson of the Great Depression • And one more:

Productivityand Wages: employers claim that wageincreases shouldbe linked to productivity increases. To correct the historicalgap betweenproductivityand wages,weall shouldget a pay increase of a approximatelya third. 90 140 190 240 290 340 390 1990 1995 2000 2005 2010 2015 Productivity and Employee Compensation Growth: 1990 - 2015 (1990 = 100) GVA per hour worked Employee Compensation

Socialisation of Enterprise Activity • If there is a demand to link wages to productivity, then workers have the right to say how that productivity is created – what kind of enterprises, in what sectors, investment decisions, innovation. • And the best place to start the long-road toward socialising enterprise activity is to increase labour rights: right to collective bargaining, right of part-time workers to full-time work, radical extension of Joint Labour Committees. • NOW: let’s discuss how we start all this.

Proposals for Discussion • 1. An increase in the Minimum Wage: to maintain parity with hourly wage growth since 2007 (most of the increase would have been in 2008), the minimum wage should be increased by €1 per hour. • 2. Strong Wage Floors to be established in JLCs • 3. Given statutory expression to the EU Directive on Part-time work which gives part-time workers the right to extra hours in their workplace when they become available (Netherlands and Germany already have this in law). • 4. The right to collective bargaining – Ireland is the only country in the industrialised world without some statutory right to collective bargaining. The premium is between 5 and 8 percent (higher in some sectors).

Proposals for Discussion • 6. Increasing the Social Wage – through the long- term doubling of employers’ PRSI. In the last budget, Unite proposed that employers’ PRSI be increased to 18 percent on incomes in excess of €100,000 and the revenue to be invested in a new pay- related unemployment benefit. This would redirect money into domestic demand. • 7. Increase taxation on capital, property and high incomes to redirect money into programmes that can reduce household expenditure. For example: each €100 million spent on affordable childcare (monthly fees of €250) would create 7,500 places. An increase of €75 million in Dublin bus subsidies would reduce fares by 40 percent.

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