David McWilliams: Dead-end street politics -- we won't accept pay cuts so now we're stuck
Published 18/07/2012 | 17:00
Take a walk through any medium-sized town in Ireland, particularly down the little uninspiring streets off the main drag, the streets named after lesser patriots, second-rate saints or the next small town you'd get to if you kept walking. There you will see them, the real victims of the recession: young men and women with nothing to do.
The CSO just released figures on the state of the jobs market and the movement in wages and what we see is that 200,000 people in Ireland are now long-term unemployed. This means that they have been out of work for more than a year. At the beginning of the recession, the vast majority of people losing their jobs were men. This was mainly the result of the collapse in house building and the evaporation of jobs on the sites.
In the past year, this has changed. We are seeing the rapid feminisation of unemployment. In the 12 months to June, long-term unemployment among women rose more than three times faster than among men. Male long-term unemployment went up by 4pc, while it shot up 13.6pc for women. In total, four out of 10 unemployed people have been out of work for more than a year.
We all know that it is harder to get a job when you have been out of work for a while, not only because of the hole in your CV, but also because it can be demoralising emotionally and physically. Anyone who has had a family member on the dole or has been out of work understands what it does to your self-esteem.
As unemployment rises, we would expect wages to be falling throughout the economy.
At least this is what basic economics teaches us. As the wage rates fall to reflect the increased amount of people looking for work, the price of labour falls and companies should take on more of these cheaper workers. That's what the theory says, but it is not happening.
In fact, the survey from the CSO shows something quite different. According to the CSO, average weekly earnings rose by 0.7pc in the year from Q1 2011-Q1 2012 but was down by 0.8pc from last quarter Q1 2011. Average hourly earnings are down in the same year period by 0.2pc but up from last quarter by 0.7pc.
Average weekly paid hours increased by 1pc from Q1 2011. Weekly earnings increased in 9 out of 13 sectors since Q1 2011. However, this figure is from gross earnings and doesn't take into account any tax deductions. I'm sure you will be screaming: "Hey my wage packet is smaller now". This is true but average weekly wages are not falling but static.
There is also a public-versus -private disparity since the recession began. The average weekly paid hours in the public sector fell by 1.6pc since 2008 but weekly wages in the private sector fell by 5.7pc.
So why is this? Why has the collapse in domestic demand in Ireland been reflected in the dramatic increase in the rate of long-term unemployment and not a fall in wages? Why have these 200,000 people suffered much more than anyone else?
This disparity is what is termed the insider/outsider phenomenon in the jobs market. When demand collapses, employers have a choice: either they can cut everyone's wages or they can fire people and keep the wages of those who stay more or less the same.
In the public sector it works differently because when the employer -- the State -- goes bust, the public sector unions must move to protect their members, otherwise they wouldn't be doing their job. It's up to the Government -- the employer -- to make the choice. With the Croke Park agreement, we have a choice of sorts.
But ultimately in both the public and the private sector, the choice has been to let people go rather than cut wages.
So where does this leave us? It leaves us with one part of the population paying a much fiercer price from the recession and another part protecting themselves. The insiders are protected and the outsiders are left to fend for themselves.
But here's where the problem gets more tricky because the interests of the unemployed and the employed clash.
The army of unemployed people wants to get back into a job and, typically, is prepared to accept lower wages for the chance of work. So it is in their interest to see the general wage level drop. But it is not in the interest of the people still in work to see the general wage level drop because they will lose out. So those in work use all their efforts to keep wages up and those who lose their jobs get locked out.
And we see the results of this in the rise of long-term unemployment creating two distinct groupings. Those in work want wages to rise or stay stable until the moment they lose their jobs. Thereafter, they have a personal interest in wages falling, which might give them a chance of getting work.
The implication of this dynamic is not just the rise in long-term unemployed, it is also the evidence we need to know that the idea of internal devaluation within the eurozone doesn't work either. Within the euro, countries are supposed to regain competitiveness through falls in wages and prices. But this isn't happening. It rarely does. So we get long-term unemployed instead of a swift re-adjustment of competitiveness through lower wages.
This means we can't become competitive versus our trading partners quickly. The only way we could do this is via a devaluation of our own currency, but we can't do this and we won't accept lower wages, so we are stuck.
The boost to demand we need has to be internally generated. This is why the Government's announcement of a €2.25 billion stimulus is welcome. But we can't spend our way out of this with money we don't have. This is why a coordinated, rapid and meaningful budgetary expansion across the eurozone is essential.
Will this happen? In fact I think it will eventually because otherwise the euro will fall apart and the pressure will come politically from the dead-end streets of towns all over Europe.
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