Pay rises will remain a flight of fancy with dodo-dead inflation
Economic activity may be on the up, but that isn’t being translated into wages growth, writes Dan O’Brien
‘WHAT is going on?” the editor of this newspaper asked with more than a hint of irritation. “You bloody economists are all saying that the economy is powering ahead, but people aren’t feeling it,” he harrumphed. He has more than a point. Last Tuesday’s monthly consumer confidence survey by the Economic and Social Research Institute and KBC Bank showed more than seven in ten people saying they are either no better off or worse off than a year ago. But then on Friday a new method of measuring the size of the economy, unveiled with some fanfare by the State’s statisticians, showed that activity is expanding rapidly even when the ‘Leprechaun economics’ distorting stuff is stripped out of the growth numbers (that matter is discussed in greater detail in the boxed section below).
Ireland and other countries have experienced ‘jobless growth’ before, but what the Irish economy is experiencing could be described, with only a little exaggeration, as ‘earningless growth’.
The first place to look for evidence of this is wages and salaries. Anecdotally, one doesn’t have to go far to find family, friends and acquaintances who have not received a pay increase in a decade. But much more reliable than anecdotes are hard statistics.
The economywide earnings figures show something quite unprecedented. Over almost a decade since the economy crashed, average pre-tax wages and salaries have effectively flatlined — they fell surprisingly little during the slump and have grown surprisingly little since the recovery began.
Let’s put some cash figures on all of this. In the first three months of this year, the average worker made €22.68 an hour before tax.
Compared with five years earlier — the point when the economy hit bottom and started to grind its way towards recovery — the increase in average hourly pay was a paltry €0.43. Forty three cents more per hour doesn’t butter many parsnips. It butters fewer still after the taxman has taken his cut.
It should be said that because people are putting in more hours on average, growth in weekly earnings has been stronger than hourly rates. But only by a smidgen. And over half a decade, the cumulative increases haven’t amounted to much.
To be precise, the average worker was earning just €23 more per week at the beginning of this year than five years earlier and, again, that amount is before the taxman had got his grasping hands on it.
So why, despite most measures of economic activity pointing to a strong expansion, has there been so little growth in earnings?
Dodo-dead inflation is one reason. Overall consumer prices are now the same as they were a decade ago. That includes everything we pay for — from basics such food and housing to luxuries like hotels and restaurants.
That may come as a surprise to many. When your columnist points out that overall consumer prices have not changed over a decade, people often react with disbelief. “What about higher rents?” they implore; “what about rocketing insurance premiums?” they wail.
It is true that some prices have risen (healthcare costs are the big outlier, up one fifth on a decade ago), but others have fallen. Mobile phone charges have collapsed. Clothing and footwear prices have been in free fall since the turn of the century. Competition in the groceries sector, among other factors, continues to drive food prices down — a supermarket trolley of identical items is now 7pc cheaper than it was in July 2007.
The fall in the price of many goods and services has almost perfectly offset increases elsewhere. Hence the extraordinarily stable overall price level.
The absence of inflation has almost certainly been an important factor in the very low level of pay awards.
Another reason wages have not risen much is the state of the jobs market. Unemployment has come down to 6pc, a rate that would normally give workers more bargaining power to squeeze bigger pay awards from bosses.
But when we look at the share of adults who are working, known as the ‘employment rate’, we find that it has recovered only a little more than half of the ground lost during the crash. That suggests that there is more hidden unemployment than the headline jobless figures suggest.
Another aspect of the jobs market that is likely to be keeping wage demands in check is immigration. There are no up-to date figures on returning Irish, but jobs numbers by nationality tell their own story.
Employment growth among non-nationals was 3.5 times higher than among nationals last year. Stronger growth in the economy is sucking more people in from abroad.
While that is good for employers and the economy overall, it may not be so good for those already working here or who are looking for work.
None of this is to say that pay stagnation is all down to a crude foreigners-aretaking-our-jobs explanation, but when there is a large supply of workers willing to move to a relatively high wage economy, it is very likely to be part of the story.
‘Compared with five years earlier the increase in average hourly pay was a paltry €0.43’