Wages and Salaries in the Labour Costs of the EU14

Eurostat produce a quarterly labour cost index. A number of sub-components are also produced. Here is the ‘wages and salaries’ component for the Business Economies (NACE B to N) of the EU14 (the previous EU15 now excluding the UK) with Q1 2013 set equal to 100.

All the selected countries have seen nominal hourly wage growth over the period ranging from 43 per cent in Austria to 13 per cent in Italy.  Ireland is second-ranked with an increase of 33 per cent over the period, along with Germany.

Next, we look at the annual growth rates with a four-quarter trailing moving average taken to smooth out some of the volatility in the series.

We seen that annual nominal hourly wage growth in Ireland is fairly stable over the past few years, averaging close to 4 per cent since 2018. This would enough to be Ireland, top of the group in 2019 and again briefly in 2020 but accelerations in many countries has seen Ireland’s relative position drop towards the bottom and is now close to Sweden, Denmark and Finland.

Of course, nominal changes are just changes in numbers. We want to assess real changes, i,.e. changes in the purchasing power of wages. To do that we must adjust for changes in the price level. We will do that with Eurostat’s Harmonised Index of Consumer Prices (HICP).  Here it ins since 2014, with the start of that year set equal to 100.

We can see that the HICP for Ireland was remarkably stably through the most of the period shown. In the HICP for Q4 2020 was little changed from what it has been in Q1 2014, i.e. there was no inflation over the period.  This certainly changed in 2021.  In the last couple of years, prices have risen by around 20 per cent in most of the selected countries. However, the reasons for the inflation have largely been common the relative ranking is largely unchanged.

Compared to Q1 2014, Ireland’s HICP was 18 per cent higher in Q2 of this year. This was the third-lowest increase in the EU14 with Greece and Denmark seeing smaller increases.  The largest increase was in Austria where the HICP was over 30 per cent higher compared to its level in 2014.

Inflation rates are coming down. The use of a four-quarter moving average understates the extent of the recent falls in inflation rates.

Our purpose is to adjust the nominal wage growth rates for inflation. We see that Austria has both the highest nominal wage growth since 2014 (43 per cent) but also the highest price level increases over the same period (HICP +32% since 2014).  Here we combine both Eurostat datasets to get an index of real, i.e. inflation-adjusted, hourly wages.

Combining wage growth and HICP inflation sees the green line move to the top, but the last few years have seen a steep decline. From 2013 to the end of 2020, real wage growth is put at +20 per cent for Ireland, around five percentages points higher than any of the other selected countries. 

During 2021 and 2022, real wages declined as the rate of inflation outpaced the growth of nominal wages.  In recent quarters they have moved closer together and real wages have been stable in Ireland in 2023 though are now only +12 per cent compared to the start of 2013. Much of the gains made up to 2021 have been reversed.  Real hourly wages in Ireland are now back to where they were in 2019.

To conclude here are the latest real annual growth rates for hourly wages:

As shown by the levels, Ireland is back close to zero. Nominal hourly wages are up close to 4.5 per cent and the HICP is around five per cent higher than it was last year.

To better see the trends for individual countries we will use a four-quarter moving average to smooth out some of the volatility.

Ireland has ground to make up to get back to the top spot it held in the pre-COVID years.

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The past is a foreign country

We all like looking to the past for evidence and pointers to help understand the present.  A deterioration in the current of the balance of payments has been such a pointer for instances of economic mismanagement in Ireland. 

Following Honohan and Walsh (2002) we can see that in the last fifty years the Irish economy has gone through two loops of:

1. Imbalances building up via that deterioration of the current account,
2. Weaknesses being exposed and resulting in a shooting up of the unemployment rate,
3. A period of painful readjustment before,
4. Recoveries took hold.

These loops from 1975 to 1998 and from 2003 to 2018 are shown below using the unemployment rate (vertical axis) and the current account (horizontal axis).

The thing is though, these are not really useful for assessment the current position of the Irish economy.  2022 saw Ireland with an average unemployment rate of around 4.5 per cent while the surplus on the modified current account of the balance of payments (CA*) was equivalent to around 7.5 per cent of modified gross national income (GNI*). 

The economy had reached a near identical position in 2019 but then COVID19 reared its head.  Relative to the economic history of the State since its foundation, it is an unprecedented position: near full employment and large balance of payments surpluses. From a policy perspective, the unemployment rate could be a bigger constraint to achieving priorities. Sure, we should not forget the mistakes of the past, but they do things differently there.

Addendum: It is somewhat nonsensical but a further way of looking at it is to consider the sum of the unemployment rate and the current account deficit (thus a deficit is represented by a positive number).  This shows:

Again, we can see the imbalances building up after 1975 and 2003.  But the main thing is to highlight just how far 2022 is from even those starting points.  We know things can change quickly but we should also recognise where we are now is pretty much unprecedented.

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Why the “working poor” makes for an inappropriate policy target

The publication by the CSO of the results from the Survey on Income and Living Conditions (SILC) always generates plenty of reaction.  One focus following the release of the 2017 results has been the “working poor” such as the headline of this piece.

The CSO provide income and poverty rates by principle economic status and the 2017 outcomes are summarised here:

As can be seen for the “at work” category the at-risk-of-poverty rate (equivalised disposable income below 60 per cent of the national median) is given as 5.4 per cent.  When we add in measures of deprivation, we find that 1.4 per cent of those with a principle economic status of “at work” live in households deemed to be in consistent poverty.  Given how low these levels are relative to other categories, the “at work” group seem a peculiar group to focus on.

Here we provide five reasons why targeting the at-work at-risk-of-poverty rate may be inappropriate.

1. Ireland already has the second-lowest AROP rate for employees in the EU15.
2. The measure is as much a function of household type, especially the presence of children, as it is labour market outcomes.
3. When it comes to labour market outcomes the most important factor is the amount of work with low AROP rates for households with high or very-high levels of work intensity.
4. The link between low pay at the level of the individual and low income at the level of the household is weak.
5. One-third of the “working poor” are self-employed who are excluded from most policy proposals.

1 Comparison across the EU15

Eurostat provide figures that allow us to compare the at-risk-of-poverty rates across the EU for people who are employed and one feature of this is how well Ireland does.  Here are the AROP rate for employees since 2009:

The 2017 figure for Ireland has not been provided to Eurostat yet but it seems likely that Ireland will have close to the second-lowest in-work at-risk-of-poverty rate for employees in the EU15.

2 The role of household type

The determination of whether of being at-risk-of-poverty is based on equivalised household income rather than than earnings of the employee on their own.  For example, you could have two employees both earning €30,000 – one could be deemed to be at-risk-of-poverty and one may not. How can that be if there are both earning the same amount? Type of households or, more particularly, children. 

If there are more people in the household then the available income has to be spread over more people thus reducing the equivalised, or per (weighted) person, income of the household. 

Here are the figures from Eurostat for the at-risk-of-poverty rates for people at work but living in two different types of households in Ireland:

• Household with two or more adults with dependent children
• Households with two or more adults without dependent children

It can be seen that, bar the peak crisis years of 2009 to 2011, the at-risk-of-poverty rates of workers in the households with children is about twice that of households without children.  It is not the labour market that drives in-work at-risk-of-poverty rates; it is household type.

3 The amount of work

This amount of work can be measured by household work-intensity: the amount of available time that someone is working.  If the working-age adults in a household have a high or very-high work intensity there is close to no chance of that household being at-risk-of poverty.

In-work, at-risk-of poverty rates are highest for those households with low work intensity.  These are households where members of working age worked between 20 per cent and 45 per cent of their total potential during the previous 12 months.  Households composed only of children, of students aged less then 25 and/or people aged 60 or more are completely excluded from the work-intensity indicator calculation.

Again, relative to the rest of the EU15, Irish households with low work intensity have at-risk-of-poverty rates well below those of other countries.

Over 60 per cent of Irish households who are classed as in-work and at-risk-of-poverty have either low or medium levels of work intensity.  It is not earnings that drives the in-work, at-risk-of-poverty rates; it is the amount of work.

Something, such as a refundable tax credit may have very little impact on at-risk-of-poverty households with children.  The at-risk-of-poverty threshold for a 2 adult plus 2 children household in 2017 was €29,000.  Even allowing for Child Benefit such a household close to that threshold which gets its income from work will have used almost all the available tax credits.  Making them refundable will make little difference to them.

The majority of households who are deemed be in-work and at-risk-of-poverty have low or medium work intensity.  Refundable tax credits in this instance would be a reflection of a low amount of work rather than low earnings.

4 Low pay and household income

The link between low pay and at-risk-of-poverty rates is weak.  Ireland has workers who are low paid but they are not in low-income households.

The chart would suggest that something around six per cent of low-pay employees (below a threshold of €12.20 a hour in the analysis shown) are in households who are at-risk-of-poverty. Or, in other words, 94 per cent of low-pay employees are in households who are not at-risk-of-poverty.  Indeed, over half of low-pay employees are in households in the top half of the income distribution.  There are almost as many low-pay employees in households in the top decile as there are in the bottom decile.

Policies, such as refundable tax credits, that target the low paid seem likely to make overall inequality and at-risk-of-poverty rates worse as very little of the benefit would accrue to those at the bottom of the income distribution.  It is likely that part-time second earners would appreciate it but in most cases these already come from middle- to high-income households.

It is also not clear how a refundable tax credit would work in the case of the self-employed. It was noted at the press briefing for the SILC publication that around one-third of those deemed to be in-work and at-risk-of-poverty are self-employed. Refundable personal and PAYE tax credits would mean that one-third of the target group is excluded. And a large share of the resources used would go to people outside the target group – the low-paid in high-income households.

Saying that the “working poor” should not be a policy target doesn’t mean we shouldn’t have policies that try to increase incomes. We should. But using the in-work at-risk-of-poverty rate as a benchmark for either the justification of certain policies or in judging the success of polices may not be appropriate.

We conclude with a comparison we have made before:

For all levels of household work intensity Ireland has at-risk-of-poverty rates that are lower than Sweden’s, and significantly so in some cases, e.g. medium and low. Yet, the overall at-risk-of-poverty rates of the countries are very similar.

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The Irish Hare is set to complete its second lap

Here is a chart from Honohan and Walsh (2002) showing Ireland going through a 25-year imbalance cycle from 1975 to 2000.  Internal imbalances are shown through the unemployment rate with external imbalances shown through the balance of payments current account deficit (these are shown using the reverse sign so positive numbers indicate deficits).

Back in 2009, Honohan pondered whether the hare was heading off on another lap.  He was right (and first raised the possibility with co-author Walsh as early as 2007). 

Anyway, here is an update of the imbalance chart using the modified current account rather than the headline one.  Outturn data from the CSO is used for 2004 to 2017 with figures for 2018 to 2020 coming from the latest Department of Finance forecasts included with Budget 2019.

The latest lap began with the current account deterioration from 2004 (though it should be noted that the range of the horizontal axis in the second chart is about half that of the first).  The current account did begin to improve after 2008 but this was coincident with the explosion in unemployment (same axis range in both charts) as consumption and, most notably, investment fell. 

Since 2012, we have been closing the loop through rapid falls in unemployment and improvement in the current account.  The current account did deteriorate in 2017 though this may have been an MNC effect related to the acquisition of stocks.  The latest forecasts from the Department of Finance show a continued erosion of the current account surplus from that point as a result of consumption and investment rises.  The forecasts have us getting us back to where we were in 2004 sometime next year or the year after so the final closing of the loop as shown above is still a forecast rather than an outturn.

If it does happen the hare will set a new PB: cutting the the lap time 25 years to 15 years (albeit, as noted by Honohan, the course was shorter this time). What’s in store for the celtic hare? Hard to know.  But let’s hope it takes a breather before heading off on its third lap.

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Growth of real wages in the EU15 since the start of 2014

Eurostat published Q3 2017 nominal hourly labour costs data earlier in the week.  Adjusting for inflation, using the Harmonised Index of Consumer Prices, we see the following picture emerge for the wages and salaries component of real labour costs since the start of 2014:

Using this approach it can be seen that Ireland has had the second-highest increase in real hourly wages since the start of 2014.  This might look good in relative terms but in absolute terms the increases remain modest.

Here is what emerges if we look at annual growth rates (smoothed over four quarters).

There are maybe two ways to interpret this.  The first, is that Ireland has the highest growth in real hourly wages in the EU15.  This growth has accelerated slightly in recent times but not massively so.  The second is that the growth of real wages has slowed in almost all EU15 countries with 11 of the 15 having a slower growth rate of real wages compared to a year ago.

The reason for this has not been a slowdown in nominal wage growth, if anything this has slightly picked up with 11 countries showing a higher nominal wage growth in Q3 2017 compared to a year earlier.  The arithmetic mean for the EU15 has gone from 1.1 per cent to 1.5 per cent.  Ireland too has seen an increase in nominal wage growth but not unusually so.  The smoothed average growth has gone from 1.2 per cent in Q3 2016 to 2.1 per cent in Q3 2017.

The reason for the slowdown in real wage growth across the EU15 has been the uptick in inflation.  The annual inflation rates from the HICP applied to the above nominal wages changes went from a mean of 0.3 per cent in Q3 2016 to a mean of 1.4 per cent in Q3 2016 with the UK, particularly showing a rapid rise in inflation. 

It’s all to with the second derivatives.  Inflation is rising faster than the increases in the growth of nominal wages hence real wage growth is slowing down – for most countries.

Ireland is one of the exceptions.  The increase in nominal wage growth over the past year in Ireland (0.9pp) is slightly above the simple average increase seen across the EU15 (0.4pp).  Inflation, though, has been non-existent in Ireland for an extended period now and remained close to zero throughout the period shown above.  Over the past year Ireland has had the smallest increase in inflation in EU15 and now has the lowest rate of inflation across the group – and this is including the large contribution made by the rapid increases in private rents. 

So put together our modest, though increasing, growth rates in nominal wages with our low rates of inflation and we get the result that Ireland has the fastest growth of real hourly wages in the EU15. For now anyway.

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