Notes on the Front

Cathal O’Loghlin, writing in the Sunday Business Post, gave us much to ponder, outlining the difficult choices that any Minister for Finance would face given the deteriorating budget finances. But midway through this considered article, Mr. O’Loghlin produced a graph. It purported to show how our competitiveness was being undermined by wages rising faster than our European counterparts. Now this simple reductionism is all of a piece – despite the fact that Government reports keep repeating that competitiveness has more to do with other factors than wages. Usually, I’d just read on – these arguments spill out like so many peas in a tin of peas. But that damn graph – it was the final pea. So let’s accept the challenge. Shall we say, graphs at dawns. Seconds can start contacting each other.

There’s any number of ways to compare wages between countries. One way is, of course, to compare percentage increases. This is how Mr. O’Loghlin looks at it.

This graph describes the numbers fairly accurately. On first glance, it would seem to provide strong evidence for Mr. O’Loghlin’s (and others’) argument. But before workers queue up outside IBEC headquarters to return their wage increases, we might want to look at this a little deeper. The following tables are based on data from the EU Commission’s AMECO database.

Well, whatever about ‘uncompetitive wage increases’, we can see that Irish industrial wages are well below average, lying in the lower half of the EU-15 table. If Irish wages were to rise to just the average, workers would need a once-off 9% increase. If Irish wages were to reach the top-5 average, workers would need a once-off 36% increase. This hardly sustains the argument that Irish wages are somehow ‘uncompetitive’.

But what about this ‘unsustainable growth’ argument? Now, we are all familiar with how percentages can be manipulated. For instance, if someone with €5 gets an extra €1 – that’s a 20% increase. If someone with €100 gets an extra €10 – that’s a 10% increase. Which would you want – the 20% or the 10%? A similar sleight of hand is at work here.

In percentage terms Irish wages are increasing ‘above average’, but what about actual EUROs in the hand? Yes, Ireland is at the upper end – but not to such an extent that it vindicates the argument that wage increases are undermining ‘competitiveness’. Rather, it merely shows that the percentage increase is ‘higher’ because it is working off a lower base than other countries.

If Irish wages grew at the same nominal level as the EU average, the difference over seven years would, today, be €25 per week (or €5 per day, or 64 cents per hours). If anyone is seriously arguing that 64 cents per hour makes the difference between success and failure in the international marketplace, then we might as well give up this industrial lark and go back to the plough.

But even this 64 cents has to be put into a broader context. One of the many arguments used – by employers’ groups, political parties, farmers organisations, etc. – for joining the EEC (at it was at the time) was that Ireland would benefit from convergence. Living standards, infrastructure, wages and our whole economic and social project would converge to European levels. This levelling-up, or convergence, argument was quite persuasive and has come true to some extent in a number of areas – for example, wages.

Irish wages have caught up significantly since 1975, despite the temporary decline following the recession of the 1980s. However, most recently, that convergence has slowed down: between 2004 and 2007 Irish wages have caught up to average EU wages by less then 2%. At that rate, it will take 14 years just to reach the EU average. And employers want to slow that down even further. What used to be good for the economy – convergence – is now harmful.

If the phenomenon of convergence to the middle (or average) is such a bad thing, what would our employers do if they were working in the New Member States? Their wage growths have been nothing short of phenomenal – in percentage terms.

Those economies must be going to hell in a hand-basket, what with the burden of bloated wage packets, and clearly Ireland is kicking some major competitive butt. Were IBEC headquartered in Tallinn, employers would be marching in the streets, occupying workers’ canteens and singing ‘We Shall Overcome’ with gusto.

Or maybe that’s a game you can play with percentages, that growing wages are both a result and a contributor to a wealth economy. Maybe that’s why these ‘wage-bloated’ countries signed up to the EU – to be in a larger market, to converge to European averages, to achieve a faster rise in living standards than what they might have achieved outside.

Besides the specific issue outlined here – how Irish wages are not high and how they are not rising disproportionately to other countries – there is a larger lesson for the Left and trade unions. When we see these kinds of numbers and the spin some will put on them, go to the source, get out your calculators, and work the data in the real world we live in.

There are a lot more peas in that tin than are ever referred by the simplistic analysis of the Right.