High domestic business costs drag down gains made in productivity

WHEN IT comes to comparing pay rates in different countries, economists say that the key thing is relativity. It’s not so much what you earn, as how that compares with workers in our trading partners.

Not only that, productivity – that is how much you produce for the amount that you are paid relative to workers in competing countries – is just as important. Iulia Siedschlag, an economist with the Economic and Social Research Institute (ESRI), says that pay increases should matter less if productivity increases ahead of them.

It may come as a surprise to some, but she points out that the most recent Organisation for Economic Co-operation and Development (OECD) figures show the centrally important areas of the Irish economy, exports of goods and services, compare very favourably with the rest of the euro zone.

She says that overall, between 1999 and 2007, the Irish economy lost competitiveness and the biggest factor in that was an increase in what we were paid, relative to what we produced.

During that time, relative to the rest of the euro zone, wages increased 2.8 per cent, meaning that for very €100 the average euro zone worker earned, Irish workers were paid €102.80. But productivity lagged, increasing by 1.7 per cent, with the result that we were paid more, but producing less.

However, Siedschlag notes that within that, sectors such as manufacturing and financial services more than paid their way.

Relative productivity grew 3.8 per cent in manufacturing, while pay grew 1.3 per cent, in financial services, relative productivity grew 4.9 per cent and pay went up 2.6 per cent.

Construction, which was just emerging from the boom, underperformed, with productivity falling by 2.4 per cent and wages growing 2.3 per cent.

Essentially, Siedschlag says that in areas focused on export, where we face international competition, Irish workers perform well against those in other countries.

“It’s the domestic sector, which is sheltered from competition and highly regulated, which is the problem,” she explains.

A lot of that regulation relates to barriers to entry, particularly in the professions, but the overall issue is competition, or the lack of it, which is keeping wages high.

Brian Devine, an economist with stockbroking firm NCB, agrees that a lack of competition in these areas is an issue. “I worked in competition in the past and the lack of competition in those areas was a particularly frustrating issue,” he says.

The high cost of services used by business, ranging across accounting, law, waste disposal and energy, are seen as “non-pay” items, but Devine agrees wages in these are a big element of those costs, as pay accounts for 58 per cent of the overall economy.

He also has a word of warning about the more competitive sectors here. Devine points out that while productivity may look high relative to pay in the multinational sector, the fact that some overseas-based companies often use their Irish subsidiaries to account for production that does not actually take place here, means that the figures can be distorted.

Mark Fielding, chief executive of the Irish Small and Medium-sized Enterprises Association, also argues that businesses are effectively penalised by high wages paid to people working in the domestic, as opposed to the traded, services sector, and particularly those employed by the State. “You can see the fingerprints of the Government all over the problem,” he says.

Social partnership and benchmarking deals with the unions, all of which governed pay, have unnecessarily pushed up costs, with a knock-on impact on overall competitiveness, he says.

He points out that the average industrial wage in Ireland is €34,000 a year, while the yearly pay packet is €41,000, those working in small businesses are paid €27,000 a year, but the average public service salary is €51,000.

At the same time, Fielding says that while his organisation’s research indicates that small business has cut wages by 13 per cent generally, and up to 16 per cent in some cases, figures from staff consultancy firms such as Mercer show that pay increased in bigger employers.

The explanation is that the State and semi-State sectors, along with many other big employers, paid the last round of the national wage agreement. “Government-run businesses are the problem,” he says.