Saturday 19 April 2014

Brendan Keenan: High salaries, because we're worth it, but can we be sure?

DO WE pay ourselves too much? It is an impossible question to answer with any scientific precision. Yet answer it we must — or at least have an agreed answer in our heads. The future depends on it.

There are two somewhat separate issues. If private pay rates are out of line, exports and investment will not be as large as they could be.

One thing we can be sure of, given the scale of private debt, is that most of any future growth in incomes will come from exports and investment, rather than increases in personal spending, so we'd better get it right.

The second issue is whether public pay is too high. The reason that matters is that, if it is higher than is reasonable, taxation will be greater than it needs to be with unfortunate economic consequences, or else public services will be worse than they need be.

In practice, it would probably be a bit of both. In practice also, it is clear that there is a widespread view that taxation has gone about as far as it can go, and services are not as good as they should be.

Unfortunately, the first view is incorrect — taxation still has a good way to go, in an upwards direction, no matter how things turn out — and the second view probably is correct; that services are not as good as they ought to be.

In the swirl of debate, not enough distinction is made between government services and government transfers. The question on transfer is how big should they be, who should give, and who should receive? Not easy, but simple.

There is nothing simple about pay, especially when it comes to comparisons, but it is the major component of actual services. We have recently seen a blizzard of data on incomes — all of it with a purpose in mind.

Last week produced an analysis of actual household income from the trade union-sponsored thinktank, the Nevin Institute. The ESRI has worked on this topic for years but the Nevin data still made interesting reading.

The core figure is that median annual household income — what might be called the typical income — was €42,000 in 2009. Averages rather than medians are more commonly used, especially if one is concentrating on inequality, as Nevin was, but the median figure is more useful for the general question of pay levels.

It is certainly not a small figure by international standards, but it has often seemed to me — and to some other observers — that we in Ireland have an exaggerated sense of what is a reasonable income.

As one of those observers (from the USA) put it some years ago, a country which regards median income as too low has got a problem. That is aside from the question of how income is to be shared, both between rich and poor and between public and private workers.

An impressive bit of research came from the Impact trade union, comparing Irish public sector wages with German. The idea here was to show that Ireland is not out of line, but it tended to show even more clearly the difference in German and Irish values. The figures suggest Germany regards teachers highly, with pay scales of €30-50,000 a year. This made a useful comparison for Impact, although one raises an eyebrow at their deduction of the pension levy from Irish salaries, which gets us into disposable income rather than actual.

There are strict teutonic relativities, with German nurses on €25-30,000 pa linked to detective sergeants. (That was my own relativity as RTE economic correspondent many years ago, but I bear no ill will).

One suspects that public/ private relativities in Germany are still more rigid than in Ireland — even in RTE — so there may be nothing like the median 14 per cent differential found by Central Bank research.

The big difference is how the Germans reward top officials. A director of the Bundesbank or a university professor gets €60,000 a year, while the secretary general of a government department draws down €130,000 — not much more than the equivalent pension here.

As I said, there is no precise answer to the question of whether pay is too high, or where. The IMF went for an indirect approach in its report last month, noting again that Ireland's share of public pay in government expenditure and the ratio of average public pay to per capita national income are among the highest in the OECD, with individual salaries particularly high for teachers and medical professionals.

The importance of all this stems from the burgeoning issue of lower pay for new entrants to the public sector. If current pay levels are a source of danger, extending them to future staff will be an act of great folly. As will increasing existing rates even at the same rate as economic growth, never mind any faster.

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