STRATEGIES FOR WAGE-LED GROWTH

Michael Taft

Unite the Union

Definition of Employee Compensation

• Employee Compensation: comprises 2 payments: • (i) Direct wage – paid by the employer to the employee.

That’s our ‘pay packet’.• (ii) Social wage – paid by the employer to a social insurance

fund. From this fund employees consume goods/services for free or at below-market prices; and is provided income supports.

• Examples: health care, pay-related unemployment benefit, pay-related social insurance pensions, maternity/paternity benefits, etc.

• A low social wage = low public services and social protection; workers have to purchase goods and services on the private market and / or full-market prices (e.g. Ireland).

Dealing With Some Wage Myths: We Paid Ourselves Too Much

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201015.00

17.00

19.00

21.00

23.00

25.00

27.00

29.00

31.00

33.00

Employee Compensation Market Economy: 2000 - 2010 (€ per hour)

Ireland Other EU-15Other EU-15 not in Bailout SOE

Prior to the crash wages were chasing inflation. When living standards and currency movements are factored in, Irish compensation never reached the EU averages.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201010.00

12.00

14.00

16.00

18.00

20.00

22.00

24.00

26.00

28.00

Employee Compensation Market Economy 2000 - 2010 (PPP per hour)

Ireland Other EU-15Other EU-15 Not in Bailout SOE

Wage Myths: We ALL Paid Ourselves Too Much. During the latter part of the asset bubble, increased direct income (income from work) was mostly concentrated in the top 10%. This seems counter-intuitive.

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th State

87373 301

-74-438 -579

-310

420

1,134

4,938

576

Average Annual Real Increases in Direct Income by Decile: 2003 - 2008 (€)

For middle income groups, social transfers compensated for the fall in direct income. The ‘squeezed middle’ was heavily reliant on social protection payments.

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th State

602 629

777

859

1,1721,207

1,100

646

365

191

755

Average Annual Real Increase Social Transfers: 2003 - 2008 (€)

The Squeezed Middle

• The average weekly income in 2013 was approximately €688 per week, or €35,800.

• However, averages can be skewered by a few high-income earners

• Better to look at median wages. Data is not very current or detailed but we can make some estimates.

• How much does the ‘squeezed middle’ earn? • The middle 60% of PAYE employees earn between

€11,750 and €51,200. And over half of this squeezed middle earns less than €30,000.

Nearly 2/3 of all PAYE employees earn less than the average wage.

€20,000 or Less €30,000 or Less €35,800 or less €50,000 or less

36.6

54.9

63.4

78.7

Distribution of Income Earners: 2010 (%)

The CSO shows a substantial level of deprivation among middle decile groups.

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th State

36.4

46.8

36.4

31.5

26.2

18.6

15.5

7.14.8

1.6

22.5

CSO Deprivation Rate by Equivalised Decile Group 2010 (%)

The CSO also shows high levels of deprivation among households with income from work

• We usually associate deprivation with households without work income (e.g. unemployed, single parents, disabled, etc.).

• However, there are high levels of deprivation among households where there are people working.

1 Per

son

Wor

king

2 Per

sons

Wor

king

3+ P

erso

ns W

orkin

g

27.5

10.8 9.9

CSO Deprivation Rate in House-holds with at Least 1 Person Work-

ing: 2011 (%)

Labour Share of Value-Added

• Wages and profits are paid out of Gross Value-Added (GVA). GVA is equal to sales minus non-labour costs (e.g. rent, utilities, goods and services, etc.).

• When GVA grows, both wages and profits may rise.• However, the split between profits and wages at any point

is zero-sum. The greater the share going to profits, the lower the share going to wages (and vice-versa).

• This is normally a straight-forward measurement. However, given the distortions in the Irish economy caused by MNC accounting activities, we have to attempt adjustments. A considerable level of profits declared in Ireland were generated in other economies.

Irish productivity is slightly above the average of other EU-15 countries.

Belgium

Netherlands

France

Germany

Ireland

Denmark

Austria

Ireland Adjusted

Spain

Sweden

Average

Italy

Finland

UK

Greece

Portugal

43.77

42.18

42.03

41.35

40.94

40.51

37.87

36.80

36.70

36.61

35.61

33.14

32.95

31.95

23.00

20.82

Value-Added per hour worked: 2014 (PPP)

Irish Wage Share of Corporate Value Added is extremely low by EU-15 standards. In 2014, were Irish wage share to reach the average of other EU-15 countries, it would mean an extra €10 billion in wages – or over €5,000 per employee.

2003 2005 2007 2009 2011 2013 201535.0%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

Wage Share of Corporate Value Added 2002 - 2015 (%)

Average Other EU-15 Ireland Ireland Adjusted

The Planet is Wage-Led: All this leads to us to the reasonable conclusion that wage increases are necessary, affordable and desirable. There are upsides and downsides to wage increases.

Upsides

• Benefits workers • Increases demand (especially

when directed at low-paid) which drives growth

• Prompts business investment• Increases tax revenue• Reduces public spending

(where increased demand leads to increased employment)

• Reduces cost of income supports (e.g. FIS)

Downsides

• Increases imports, reducing net exports – impacts negatively on growth

• Impacts negatively on business investment

• Increases inflation• Can increase public spending (e.g.

public sector workers)• Creates ‘free-riders’ (where

organised workplaces are disadvantaged vis-à-vis non-organised workplaces)

• Can reduce competitiveness (in the export sector)

The Planet is Wage-Led: the ILO Study

• The ILO conducted a major series of studies on the impact of wage increases (increasing the labour share).

• They found that increasing the labour share produces a rise in GDP (a .25 multiplier). While net exports / investment falls – consumption increase compensates.

• Conversely, they found increasing the profit share lowers GDP• BUT: a sting in the tail: for small open economies increasing labour

share results in falling GDP. This is because net exports are reduced but the domestic market is too small to take advantage of increased consumption.

• In fact, the problem could be worse for Ireland which has a higher level of imports for private consumption (20 percent as opposed to 10 to 13 percent for other SOEs.

• HOWEVER: this is a static analysis and takes no account of rising productivity.

Issues regarding wage-led growth theory

• There are two issues which we should be aware of:• First, political: wage-led growth can be convenient for

some Government Ministers because it is something that other agencies should do (private sector business). Similar to hearing demands on banks to write-off debt. It removes the issue from political action.

• Second, wage-led growth can lead us to believe the crisis is one of aggregate demand – rather than it being a crisis of finance capital, privatisation of credit and chronic under-investment. Increasing the labour share will have positive benefits globally (or on a European level) but unless we deal with the fundamental flaws, we will remain stuck in an unequal stagnating economy.

Wage-led Growth: Irish Issues

• We must integrate wage-led growth proposals into a larger analysis of the Irish economy:

• The privileging of finance capital over productive investment

• The under-performance of the indigenous enterprise sector – with low value-added activity

• The historical investment flaw – high corporate profits but low corporate investment (a feature of a tax-haven economy)

A Wage-Led Strategy Must Go Beyond Just Wages

• A poor indigenous enterprise base in the productive sectors means a lower level of consumption recirculated in the domestic economy. A wage-led strategy will be more successful if accompanied by a progressive enterprise strategy that seeks to break with the current tax-haven/FDI dominated policies – a strategy that builds a more sustainable export base and can provide import substitution.

• Need for higher value-added economic activity where wages make up less a proportion of costs, turnover, etc. Low-value added activities cannot generate high incomes. However, the Irish indigenous sector compares poorly with other SOEs.

Arguments for a Wage-Led Strategy Must Go Beyond Just Wages

Denmark Austria Finland Sweden Ireland

19,892

17,132

15,574 15,394

11,818

Indigenous Enterprise Value-Added per capita excluding construction (working age population): 2009 (€)

Finland Sweden Austria Denmark Belgium Ireland

14.3%

11.7%11.4%

10.9%

9.7%

5.5%

Indigenous Manufacturing Em-ployment as a % of Total Em-

ployment

The historical flaw in corporate investment: Irish profits take a far higher proportion of corporate GVA than the Eurozone. Corporate investment, however, is lower.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Corporate Profit and Investment as a % of GVA: 2002 - 2012

Ireland - Profit EU-15 - ProfitIreland - Investment EU-15 - Investment

Starting the arguments over wage-led growth

• We don’t have to wait until we resolve the issues of finance capital, poor indigenous enterprise and the historical investment flaw. There are a number of indicators that show that we can commence wage-led strategies immediately.

• First, NERI has argued that since the balance-of-payments (essentially our ledger book with the rest of the world) is strongly positive – this will facilitate wage increases.

• Currently our balance-of-payments in is surplus. We take in €11 billion more than we pay out to the rest of the world. This provides substantial scope for wage growth without affecting our balance with the rest of the world.

Arguments for a Wage-Led Strategy

• Second, employee compensation are low by EU-15 standards. In 2011, Irish employee compensation would need to rise by over 14 percent to reach the average of other EU-15 countries.

Denmark

Sweden

Belgium

France

Luxembourg

Netherlands

Germany

Finland

Austria

AVERAGE

Italy

Ireland

Spain

UK

Greece

Portugal

39.61

39.28

38.65

34.26

33.68

31.29

30.10

29.86

29.06

28.56

26.19

24.57

20.80

18.95

15.88

12.25

Employee Compensation in Business Economy: 2011 (€)

Arguments for a Wage-Led Strategy

• Third, wage increases can also come via the social wage and increased social protection. This means workers’ net income rises as expenditure is ‘socialised’. Affordable childcare, free GP care and prescription medicine, fully free education, increased subsidies to public transport, etc.

• Fourth, labour costs in Ireland make up a smaller proportion of total operating costs in economy.

UK

France

Sweden

Germany

Average - Other Countries

Austria

Greece

Belgium

Ireland (adjusted)

Ireland

33.2%

32.6%

31.7%

30.4%

29.8%

28.7%

27.4%

24.4%

22.4%

20.6%

Employee Compensation as a % of Total Operating Costs: 2010

Arguments for a Wage-Led Strategy

• Fifth, though wages have stagnated over the two years, some groups have seen their incomes rise considerably. Disproportionate increases to higher income levels are economically damaging (higher savings, less spending, import-dense).

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ofes

siona

ls an

d as

socia

ted

prof

essio

nals

5.3

-4.9-7.2

Increase in Weekly Earnings: 2011 -2013 Q3 (%)

Arguments for a Wage-Led Strategy: Finally, we still have a long ways to go before we reach employee compensation levels in other SOEs while our productivity levels are mid-range.

Denmark

Sweden

Belgium

Average Other SOEs

Finland

Austria

Ireland

39.61

39.28

38.65

35.29

29.86

29.06

24.57

Employee Compensation in Market Economy: 2011 (€ per hour)

Belgium

Ireland

Denmark

Average Other SOEs

Ireland (adjusted)

Sweden

Austria

Finland

41.9710292639339

41.27

39.0132797321422

37.16

36.73

36.4897490836424

35.9794730847395

32.344834105303

Productivity: Value-Added per hour 2011 (PPP)

All arguments for sustainable wage-led growth lead to greater socialisation of the economy.

• So we don’t have to wait to resolve potential problems in wage-led strategies for a small open economy. Besides, other SOEs have much higher levels of employee compensation. But a long-term sustainable wage-led strategy involves greater socialisation of the Irish economy:

1) Socialisation of the value-added through higher labour share

2) Socialisation of our credit functions (through public banking, stronger regulation of banking and credit, etc.)

3) Socialisation of goods and services through a higher social wage (increasing markets for health, pensions, education and income supports).

4) Socialisation of investment – the great lesson of the Great Depression

• And one more:

Productivity and Wages: employers claim that wage increases should be linked to productivity increases. To correct the historical gap between productivity and wages, we all should get a pay increase of a approximately a third.

1990 1995 2000 2005 2010 201590

140

190

240

290

340

390

Productivity and Employee Compensation Growth: 1990 - 2015 (1990 = 100)

GVA per hour worked Employee Compensation

Socialisation of Enterprise Activity• If there is a demand to link wages to productivity, then

workers have the right to say how that productivity is created – what kind of enterprises, in what sectors, investment decisions, innovation.

• And the best place to start the long-road toward socialising enterprise activity is to increase labour rights: right to collective bargaining, right of part-time workers to full-time work, radical extension of Joint Labour Committees.

• NOW: let’s discuss how we start all this.

Proposals for Discussion• 1. An increase in the Minimum Wage: to maintain

parity with hourly wage growth since 2007 (most of the increase would have been in 2008), the minimum wage should be increased by €1 per hour.

• 2. Strong Wage Floors to be established in JLCs• 3. Given statutory expression to the EU Directive on

Part-time work which gives part-time workers the right to extra hours in their workplace when they become available (Netherlands and Germany already have this in law).

• 4. The right to collective bargaining – Ireland is the only country in the industrialised world without some statutory right to collective bargaining. The premium is between 5 and 8 percent (higher in some sectors).

Proposals for Discussion• 6. Increasing the Social Wage – through the long-term

doubling of employers’ PRSI. In the last budget, Unite proposed that employers’ PRSI be increased to 18 percent on incomes in excess of €100,000 and the revenue to be invested in a new pay-related unemployment benefit. This would redirect money into domestic demand.

• 7. Increase taxation on capital, property and high incomes to redirect money into programmes that can reduce household expenditure. For example: each €100 million spent on affordable childcare (monthly fees of €250) would create 7,500 places. An increase of €75 million in Dublin bus subsidies would reduce fares by 40 percent.