Today is a day of national strike by Ireland’s public sector workers. Speaking about today’s strike on yesterday’s Morning Ireland, Aine Lawlor and Shay Cody of IMPACT came very close to blows – verbally, of course – when discussing current trends in wages across public and private sectors. Mr Cody cited recent CSO figures showing that industrial wages actually rose between the second quarter of 2008 and the second quarter of 2009. Ms Lawlor, on the other hand, was convinced by Garrett Fitzgerald’s argument in Saturday’s Irish Times that what the CSO measures is not the same thing as the average private sector wage.
On the face of it, there seems much merit to the union argument that public sector workers should not be singled out, if private sector workers are not facing a hit. For example, the Irish Times recently reported, based on a survey it commissioned, that 7 out of 10 workers have not had any reduction in their pay or their hours. However, the argument that we need neither a cut in public sector numbers nor a cut in their pay simply does not stack up, despite the almost religious zeal with which the sense of persecution among public sector workers seems to grow.
Here are the top three arguments against the union line of no cuts in public sector pay:
1. Firstly, public sector pay is an Exchequer issue, private sector pay is not. Who determines private sector wages? The customers of their goods – for Ireland’s exporters, these are global consumers, based elsewhere. For Ireland’s pharmaceutical companies, for example, demand has held up over the past two years, meaning there has been little pressure for them to cut wages drastically. Who determines public sector pay? The Irish taxpayer is the shareholder and customer. And the Irish taxpayer is broke. A huge gap between tax receipts and government spending has opened up this year, exposing the frivolous pattern of expanding public spending in recent years. It is simply unsustainable.
2. Secondly, we simply do not know what is happening earnings in the vast majority of the private sector. What is being measured by the CSO is purely the wages in “Industry” and financial services. While “Industry” sounds broad, it includes only those involved in mining, manufacturing and utilities. Manufacturing and finance are easily the two largest sectors of the four covered and employ currently about 270,000 people. This is similar in size to the public sector excluding health (260,000). It does not make it representative of the 1.2 million other private sector workers, about whose wages we know almost nothing.
3. Thirdly, private and public sectors will always adjust to recessions in different ways. In fact, for a long part of the twentieth century, this was quite a puzzle for macroeconomists. Why do earnings not fall in economic downturns? The reason – as most private sector workers could have probably told them – is that private sector firms adjust not by cutting rates of pay but by cutting “marginal” workers and “marginal” hours worked (i.e. overtime).
Economists call this the difference between intensive and extensive labour market adjustments. Let’s look at the Irish manufacturing and finance sectors as a single company. That company’s annual pay bill was over €13bn in early 2008, almost the same as the pay bill of the public sector (ex. health). To achieve savings, it could introduce a series of intensive cuts, cutting everyone’s pay rates and the typical working week. What we know about the private sector, though, is that it prefers to undertake ‘extensive’ cuts, letting go of workers and cutting back on overtime.
And that is what has happened. While wages in manufacturing were 1% higher in mid-2009 than a year ago, numbers employed have fallen heavily. Ireland’s manufacturing and financial sectors have cut their pay bill by almost 12% in the last year, as is shown below. The public sector pay bill is still rising. If it had achieved similar cuts to the sectors shown, through whatever channel, the Exchequer would have saved €1.5bn this year.
On the other hand, the public sector – and particularly in Ireland – works to a different beat. Firstly, as a general rule, employment levels in the public sector will be more acyclical than the private sector by for supply reasons (governments want to diminish not amplify the severity of business cycles) and for demand reasons (by the very nature of public services, e.g. defence, education and health, it’s unlikely that people want less of them in recessions). Secondly, Ireland is already paying a huge chunk of its economy (almost 55%) on its public services, particularly compared to the level of services provided in other countries spending a similar price.
We’re paying a very high price for public services, one that we cannot afford to keep up in the years ahead. To get our costs back into line, we could in theory cut the number of public sector workers, and thereby cut the services we get. Or we could cut the price we pay for those services.
Over on irisheconomy.ie, on a discussion of teachers’ wages, one teacher commented that she would be prepared to work longer hours if necessary, but she was not prepared to have her pay cut. One of the contributors to the site pointed out what she was actually saying: in a staff room of 20, she would rather the government fired one of her colleagues than cut all their pay 5%. If that’s what the unions want, they should say so, but ultimately it is the taxpayer and not the unions that has the right to decide.