Saturday 1 October 2016

Unprotected labour market is Ireland's flexible friend

Published 06/08/2015 | 02:30

We had a visitor from a Beijing think tank the other week. She wanted to know the reasons behind the rapid Irish recovery from such a horrendous crash. If only she'd come last week!

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Everyone is interested. The German think tanks must be very relieved. It looks like the medicine can work. At home, some must be discomfited. Failed predictions about soft landings have been followed by failed predictions about permanent grounding of the economy. Whoever said economics is a branch of history was probably right.

Not that history is easy. Even austerity seems to have lost its past bite. Almost all EU countries, whether in bailouts or not, are returning to their pre-crash levels of output at much the same time. Spain and Portugal lag a bit, but not that much, and Ireland has now passed the previous peak.

There are certain things about the Irish economy which gave it advantages the other indebted euro countries do not share. Two-thirds of its trade is outside the euro area, mostly to the UK and US. That trade is enormous, as it is bound to be when the likes of Google revenues are part of it.

Another is that structural reform was not really relevant for Ireland. Studies by the IMF found no few structural problems serious enough to do real harm to the economy. Sure, there would be advantages if medicines were cheaper, State utilities maximised benefits to their customers rather than their staffs, and public administration allocated resources on any obviously rational basis. But it would not make much difference to GDP.

That is just as well, because it seems pretty clear that, for governments, structural reforms (let's be neutral and say "changes") are politically more difficult than the austerity measures of higher taxes and spending curbs. The lesson seems to be that specific effects - the arrival of a water bill for instance - cause more trouble than general ones, like a rise in taxes, or even an increase in medical bills.

One way of looking at it is to say that Ireland's government was not so much braver or more resolute than those of other countries, but that it had less of a political challenge.

The structures in Ireland - which were the product of previous government actions , or more often inaction - were more conducive to recovery than those elsewhere.

A key political question is to what extent the structure of the labour market helps explain the largely unexpected recovery in employment. A research paper in last month's quarterly report from the Central Bank provides useful information on that question.

 We already know that the fall in employment was dramatic, down by 15pc in the two years from 2007. Unemployment rose from 4pc to 15pc, while the hours worked by those still in jobs fell 20pc.

Clearly, a lot of that was due to the fall in demand clearest of all in construction, where almost half of firms cut labour costs, compared to a third for the whole economy Less clear is how much of the cost-cutting was to keep firms alive, and to what extent did it succeed.

The paper, by bank analysts Suzanne Linehan, Reamonn Lydon and John Scally, is based on the European Central Bank system's "Wage Dynamics Research Network" (WDN), which surveys companies on labour-related issues.

It finds that the Irish response to the Crash did have particular features. A common response was to cut employee numbers, with around 30pc of firms reporting this approach. There may, however, be even more significance in the finding that a majority of firms surveyed were able to freeze wages, while a quarter cut basic employee pay in both the periods covered; 2008-9 and 2010-13.

A similar percentage cut payments such as bonuses, although presumably that is easier to do. Reducing working hours was a relatively less common response and the findings seem to challenge the frequent assertion that there was little wage reduction in the Irish private sector's response to the crisis.

History would suggest that it is almost impossible to cut basic pay. This inability was cited as one of the risks in euro membership, because the back-door method of currency depreciation is been lost.

The popularity (although that is hardly the right word) of wage freezes might seem to confirm the difficulty of pay cuts. But the survey showed such cuts were also widespread, with almost a quarter of firms polled indicating that they had imposed them during both survey periods.

The scale of it was hard to measure from previous overall data because 14pc of firms actually increased wages during the depression. Half of these were foreign-owned. That is hardly a surprise but indicates once again the dangers of drawing broad conclusions from aggregate Irish statistics.

Another peculiarity of the Irish economy was that there was a shortage of skilled white-collar workers throughout the crash. Equally peculiar is that this is the group which suffered most from pay cuts. One possible explanation is that firms - often in the financial industry - did not want to lose these workers' skills by making them redundant, but found that staff were willing to accept pay reductions because of their fear of redundancy.

The euro survey gives some opportunity to do cross-country comparisons, although more will arise as further data is published. The paper finds that only Estonia had more cuts in basic pay, with 44pc of firms taking this action - almost double the Irish percentage.

Changes in labour law and the decline of trade union power in the private sector have made the Irish labour market more flexible. The end (for now at least) of the union dream of national wage bargaining may also have contributed. The paper notes the almost complete collapse in collective pay bargaining since the start of the recession.

This could also have something to do with what may be the most sensitive finding. In the latter period of the crash, almost a third of companies said they were re-hiring at lower wages than those of the workers they had let go. This gives a different twist to the jobs recovery and may help explain the initially sluggish response of income tax receipts.

In a week which also saw the latest warnings from the National Competitiveness Council, the survey found that employers complained more about payroll taxes than wage levels, and that decisions on hiring and wages were driven mainly by competition from rivals, whether foreign or domestic.

It seems safe to day that Ireland's labour market is more flexible than those of Italy or Spain, and that this has been good for employment. It is also safe to say that nobody likes that kind of flexibility, and that it is not pleasant being on the receiving end.

Making the markets more flexible by reducing workers' entitlements is one of the most difficult of structural reforms for European governments. For Irish governments, the challenge is to preserve a jobs-friendly system rather than create one - but that's not easy either.

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