Wednesday, July 8, 2015

And whatever you’re having yourself – a stat for every argument

There are lots of claims that can be made about the Irish economy and most of them can be supported with some sort of statistical evidence – even opposing ones.  Here we will consider four such claims:

  • Ireland is a low-pay economy.
  • Ireland is a high-productivity economy.
  • Ireland is a low-investment economy.
  • Ireland is a high-profit economy.

All of these are entirely right (and as we will see later entirely wrong – well three of them anyway). 

Let’s look at aggregate data from Eurostat on ‘the business economy’.  This is NACE sectors B to N (excluding K) and S95.  And from this we can derive four measures of the economy.

  • Labour share: Personnel costs as a proportion of gross value added
  • Wage adjusted labour productivity: Value added as a proportion of personnel costs.
  • Investment rate: Gross investment in tangible assets as a proportion of gross operating surplus.
  • Gross operating rate: Gross operating surplus as a proportion of turnover.

Of course, the second is just the inverse of the first so doesn’t add anything but let’s not worry about that.  So let’s go through the claims one-by-0ne.  First, Ireland is a low-pay economy. [Recall that all the statistics here relate to ‘the business economy’.]

Labour Share - Total

Yes, there we are right down at the bottom alongside Romania and Bulgaria.  Let’s invert this and look at a simple wage-adjusted measure of labour productivity – what is value added as a proportion of labour costs?

Labour Productivity - Total

And that says the same thing as the first chart but here we say that relative to personnel costs firms in Ireland produce a lot of gross value added.

Okay, let’s look at something a bit different: the investment rate.  What proportion of gross operating surplus is set aside for investment?

Investment - Total

Now, we’re right down at the bottom.  No country in the EU has enterprises investing a smaller proportion of their gross operating surplus in tangible assets than Ireland.

But this lack of investment doesn’t seem to be harming profits.  Here is gross operating surplus as a share of turnover: the gross operating rate.

Profitability - Total

And we jump from last to first.

So there we have it.  There really should be no need to go any further. Ireland is a low-pay, high-productivity, low-investment, high-profit economy.  But we have to have “but on the other hand”.  And the caveat to the above findings is this chart because ‘the business economy’ in Ireland is different to other countries: more than half the gross-value added in the business economy in Ireland comes from foreign-owned companies.

Value Added Dom v For

So what if we look at our pay, productivity, investment and profit measures for domestically-controlled and foreign-controlled enterprises?

Well, this happens for the labour share.

Labour Share - Dom v For

Whoa.  Ireland is top (well one from the top) AND bottom.  Ireland has the second highest labour share for domestically-controlled enterprises in the EU.  Only domestic French companies devote more of their gross value added to personnel costs. 

On the other we can see that Ireland has the lowest labour share for foreign-controlled companies in the EU.  Does anyone think that there is low-pay in the foreign-controlled companies in Ireland?  The labour share would suggest they are but clear they are not.  Any such is the scale of the value added by foreign companies in Ireland that their labour share means Ireland’s position in the overall table is at the bottom.  However, if we just look at Irish-owned firms (who employ 78 per cent of people in the business economy) the labour share in Ireland is right at the top.

Our simple measure of wage adjusted productivity just gives us the inverse of the labour share but let’s just show it anyway.

Labour Productivity - Dom v For

So Irish-owned firms are towards the bottom of their peer group and we can see that the productivity in foreign-owned firms in Ireland is “off the chart”.

Next we turn to profitability.

Profitability - Dom v For

Irish firms aren’t particularly profitable and, once-again, we top the table for foreign-controlled firms.  The breakdown of gross operating surplus between domestic and foreign firms in Ireland is an outlier.

Gross Operating Surplus Dom v For

In Ireland, just 28.5 per cent of the gross operating surplus generated in the business economy comes from domestic enterprises.  The average for the other 27 countries in the EU is 71.5 per cent.

Why are Irish firms so unprofitable?  Well, maybe our last measure will help answer that: the investment rate.

Investment - Dom v For

Not really.  Irish firms appear to be moderate investors.  They rank 17th in the EU28 and 6th in the EU15.  Their investment rate is 53 per cent compared to an EU28 mean of 61 per cent – though we should note that this only includes investment in tangible assets.

So, aggregate data shows the Irish economy to be low pay, high productivity, low investment and high profit.  However, if we want to describe Irish firms (and again 78 per cent of people employed by enterprises in the business economy are with Irish-controlled firms) then we would say that Irish firms are high pay, low productivity, low profit and moderate investment – but if you want to say the opposite we’ve a stat for that too!

Finally, here are the wages and profits of domestic companies as a proportion of gross national income (GNI).

GOS Personnel Costs to GNI Domestic

Any chance of a “low-profit commission”?

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