Ireland was only EU state to experience fall in labour costs since 2000

Ireland was the only EU state to experience a fall in labour costs between 2000 and 2016, while at the same time productivity grew at twice the EU average.

The fall in labour costs reflected the severity of the crash and the subsequent deepening of capital investment by multinationals, according to a new report by the Central Statistics Office (CSO).

The report, which examines productivity in Ireland over an extended period, shows that the State had one of the highest levels of growth in unit labour costs (ULC) in the lead up to 2008, when the economy began to overheat and there was significant loss of competitiveness.

However, this was turned on its head after the crash when layoffs and falling wages drove labour costs down, with employee income relative to labour productivity falling.

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Per unit labour costs were also driven down by investment in capital by multinationals, which meant employees were working with a greater level of machinery or capital inputs.

Overall the CSO’s report shows labour productivity in Ireland grew at an average annual rate of 4.5 per cent between 2000 and 2016, more than twice the EU average.

However, the CSO noted that while increases in productivity growth are typically associated with improvements in living standards, in Ireland’s case much of the growth was generated by the multinational sector with limited spillover into the domestic sector.

Irish households

“There are many instances of very high productivity growth that result in a limited spillover into the ‘Domestic and Other Sector’ of the economy and in turn to Irish households,” the CSO said.

The organisation’s new productivity numbers, which will be published on an annual basis, shows most of the growth in productivity or business efficiency was driven by increased capital investment.

Productivity then jumped by 26 per cent in 2015 as a result of “major globalisation events” which saw the relocation of €300 billion in capital assets to Ireland by multinationals – mainly in the form of intellectual property.

At the time the CSO was forced to revise gross domestic product growth for 2015 up to 26 per cent, a figure that was derided by US economist Paul Krugman as "leprechaun economics".

Despite having had one of the highest levels of growth in nominal ULC, which measures employee compensation relative to real labour productivity, from 2000 to 2008, Ireland is the only country in the EU to have had a cumulative fall in nominal ULC over the entire period 2000 to 2016.

Capital stock

The latest figures show Ireland’s capital stock per worker has increased from €150,000 to €378,000 per worker between 2000 and 2016, an increase of 152 per cent, the highest level of growth recorded in the EU.

Capital stock per worker for the foreign sector increased by an average annual growth rate of 6.9 per cent to 2014. When the period is extended to 2016, the growth rate increases substantially to almost 32 per cent, reflecting the transfer in capital assets here in 2015

The growth in capital stock per worker in just the “Domestic and Other Sector” was around 3.5 per cent for the period up to 2016.

The EU average annual growth in capital stocks per worker from 2000 to 2016 was 0.6 per cent.

"The results in this publication are based on new work by the CSO to help users understand the impact the highly globalised nature of the Irish economy has on productivity measures," said the CSO's Michael Connolly.