Wage cuts will deflate the economy even more and will not improve our competitiveness, writes PAUL SWEENEY

‘WAGE AND salary cuts of 10-15 per cent in all sectors of the economy are required to restore Ireland’s competitiveness,” consultant economist Dr Peter Bacon said at the MacGill Summer School this week. However, wage cuts will lead to deflation and exacerbate the crisis. Further, wages are but a small part of competitiveness.

Many economic commentators and now some serious economists are advocating “solutions” which would make middle-class and working people pay for the banking crisis, with cuts in actual wages, on top of tax rises. One can understand that some employers might make the assertion that wages are falling, to “soften” up workers, especially non-unionised, for further cuts. It is surprising to read it from an economist of the stature of Dr Garret Fitzgerald (last Saturday).

To equate pay with competitiveness is to regress in our understanding of this complicated subject. That Drs FitzGerald and Bacon equated the two, without even a consideration of productivity, distracts from seriously addressing the crisis. Dr FitzGerald made the valid point that wages have risen faster here than in competitor countries, but that is inevitable in a currency union. Once we joined the euro in 1999, our low wages were bound to drift up to the European average.

He was wrong to assert that “in 2006, we were paying ourselves 10 per cent more than was the case with the rest of the 14 EU partners”. According to the US Bureau of Labor Statistics, only French, Spanish, Italian and Portuguese workers were paid less than Irish manufacturing workers. Ireland’s $25.96 an hour compared to $27.10 in the UK and to over $32 an hour in Holland, Germany and Denmark. Taking the more important “total cost of employing an Irish worker”, Ireland was well below most EU and many OECD countries in 2007. To reduce the complex issue of competitiveness to mere wage levels, as both economists do, is reductio ad absurdum.

It is also untrue to say that wages are already falling generally. The latest data from CSO shows that earnings rose by 4.6 per cent an hour in the private sector and by a smaller 3.4 per cent weekly in the public sector. This data was for 2008 and the year to Q1 2009 respectively. For the rest of this year, earnings in the public sector will fall, because of imposition of the “pensions levy” which averages cuts of 6.8%.

In the private sector, wages are not falling except for a minority of workers. The respected industrial relations magazine, IRN, names those firms paying rises, freezing (the majority) and the minority which are cutting basic wages, based on its many contacts, listing 100 firms who have paid increases.

IRN also quotes recent surveys which show that wages are not being cut, but are largely being frozen. One major survey by Mercers showed that, over the past 6 months, 47 per cent of firms froze salaries at 2008 levels and only 9 per cent reduced them on 2008. This is similar to an earlier survey with 53 per cent freezing and 7 per cent cutting and 7 per cent paying rises.

The Ibec survey of last week, more representative than those of other employer groups, also shows that more production workers are getting pay increases than are taking cuts. The number of firms cutting pay for managers and “other staff” is greater, but is still far from a majority of workers. Most firms are freezing wages and salaries, not cutting them.

For some in the private sector, but for none in the public sector, real wages and earnings may actually rise. IRN makes the important point that take-home pay has fallen because hours worked have fallen, but that this is not the same as a cut in basic pay, which seems to be the argument being made by Dr Fitzgerald and others.

Others include Colm McCarthy. In his report on public spending cuts, Mr McCarthy also asserts that because “pay” is falling in the private sector, so there must be social welfare cuts of a whopping 5 per cent. Mr McCarthy “justifies” cutting welfare rates because “there appears to have been reductions in private sector pay rates”.

There appears to be confusion between wages and earnings. Workers and employers are doing lots of innovative things to reduce labour costs, but the evidence to date is that the reduction of nominal wages is the very last resort. It appears to be occurring only for a minority of employees in private firms.

There is no better way to further deflate the economy than to cut welfare and incomes for the low paid. These groups have a high propensity to spend all their incomes and so maintain consumer demand.

Already domestic consumption, which averaged 55 per cent of national income over the previous five years, has risen to 60 per cent of a much smaller GNP, as investment collapsed. To cut wages and to cut social welfare will deflate domestic consumption further, driving many more firms out of business.

Some economists may argue that foreign demand will make up the shortfall in demand, but the IMF predicts that advanced economies will shrink by a substantial 3.8 per cent this year. The fall in world trade in 2009 for advanced countries will be the sharpest ever, at almost -14 per cent.

Domestic demand is a complex area for a small open economy. Uniquely, Ireland’s foreign trade is still holding up well, but workers’ spending power is vital too. Cutting wages will not improve Ireland’s competitiveness, but it will deflate the economy even more. We have serious economic problems. It is best to address them together and not to dump on employees and those on welfare.

Paul Sweeney is economic adviser with trade union group Congress