Where’s the boom in non-labour earnings?

One of the most notable features of the Irish recovery in recent years has been the surge in employee earnings.  Compensation of employees received in the first half of 2018 was almost 12 per cent higher than in the equivalent period of 2008 (€40.4 billion to €45.2 billion).  The chart below shows this. It is in nominal terms though relative prices between 2008 and 2018 are not hugely different in overall terms.

But with labour earnings booming it is worth considering what has happened to non-labour income.  The institutional sector accounts allow us to do this. Here is a chart of property income as defined in the institutional sector accounts since 2005.

The pattern here is very different to the pattern shown in the first chart.  There has been no boom in property income and it remains below the levels seen in 2007 and 2008.

There have been some changes within the total.  Interest received is down 70 per cent since 2008.  The distributed income of corporations returned to its 2008 level in 2017 and has grown 70 per cent since 2013.  It would be useful to get a breakdown of the distributed income of corporations into actual dividends received (which is capital income) and withdrawals from quasi-corporations such as large partnerships (which has some links to employment).  The definitions of the investment income linked to insurance policies and pension entitlements is available here.

One thing to note is that the above chart does not include income earned by households as suppliers as services.  This will include the income of independent traders (the self-employed) and the income of households as a supplier of housing services (landlords).  The only rent included in the above chart is rent on natural resources or land.

To complete our look at earned income we must look at mixed income and gross operating surplus.  Mixed income is the income of the self-employed and the operating surplus of the household income is derived from the provision of housing services.

First, mixed income:

This is still way below the previous peak and is only rising slowly.  This is likely linked to the construction sector and the engagement of contractors.

Second, the gross operating surplus of the household sector:

OK, so maybe we have a boom in non-labour income after all.  This is the capital income households earn as suppliers of housing services after the deduction of costs for maintenance, repairs, utility charges and property taxes. 

One important consideration here is as most households own their own home it is an imputed income from the housing services they supply to themselves.  Money doesn’t actually change hands but it is the amount as if owner-occupier households were charging rent to themselves.  This imputed rent is based on market rents.

Of course, there are plenty of instances of those owning housing provided housing services to others and charging actual rents for the supply of these services.  It would be ideal if the gross operating surplus shown above was available for actual and imputed rents but it does not appear to be so.

The CSO do provide a measure of net rent of dwellings (i.e. after depreciation) that is divided into actual and imputed rents so this gives a reasonable idea of what has happened.  The net amount for 2017 is around €3.5 billion below the gross amount shown above which reflects the depreciation set against the capital assets.

We can see that since that imputed rents have contributed significantly to the increase in this item of capital income.  Actual rents received have also increased. 

In net terms, actual rents received for housing have increased from €1.8 billion in 2008 to €3.0 billion in 2018.  In fact, the share of actual rents in the above total has increased from 21 per cent in 2008 to 27 per cent in 2017.

An alternative way of looking at this is, rather than look at income, to look at the amount of rent included as consumption.  This is the aggregate amount of housing services consumed so is before the deduction of costs, charges and depreciation.

The aggregate amount of actual rents in household consumption expenditure has gone from €3.0 billion in 2008 to €4.5 billion in 2017.  It has gone from 19.5 per cent of household rental consumption to 24.5 per cent.

Anyway, the summary is that the boom in labour income has not been matched by a boom in non-labour income, dwelling rentals and in particular the imputed rentals of dwellings excepted.

Here is a table with the past five years of figures for the main items covered above with a further breakdown of employee compensation by the sectors who pay it.

Since 2013, there has been a €16 billion rise in compensation of employees received and a €3.5 billion rise in the imputed rentals of owner-occupier household to themselves.  The incomes of the self-employed (mixed income) have risen around €2 billion.  After that the changes become even smaller.

In percentage term, the distribution income of corporations paid to households is up 70 per cent and actual rentals paid by household are up 40 per cent though these make relatively small contributions to the overall change in the income of the household sector which has primarily been driven by employee, and to a lesser extent, self-employed income.