There’s a recurring question as to how best to articulate the character of the competitiveness bind that Ireland now finds itself in. There’s no doubt in my mind that it is real, but it is also the case that some reasonable people with no axe to grind in the matter either doubt it or would at least like to see a much clearer articulation of the matter before they make up their minds.
It is possible to go around in circles indefinitely looking at competitiveness at the level of its individual components. It is true that there is much more to competitiveness than costs. It is true that Irish labour costs actually compare reasonably well with those of some other regions within the EU. But it is also true that we are already pursuing non-cost aspects of competitivess vigorously, and it’s turning out clearly not to be enough.
There are probably any number of ways to illustrate this, but I have spent a lot of my career looking at policy from a skills and labour market perspective, so I’m drawn to taking a labour market perspective.
As a small open economy, Ireland imports a large share of the goods and services it needs. Over the longer term, these are paid for mainly through the earnings of those working in exporting industries and their subsuppliers and service providers. The value of exports, and even the value added in exports, are misleading indicators because much of the value leaves the country directly through paying for inputs or through repatriation of profits and royalties.
So it is interesting to look at the number of people whose imports each person working in exporting industry pays for. For the sake of simplicity I’ll leave agriculture to one side, as most of the net value it adds to the economy is through transfers from the EU rather than market returns on production.
Data on employment at clients of the industrial development agencies provides a good approximation for employment in exporting industries. This is published annually in the Forfás Employment Survey.
The chart below looks at the ratios between three variables and employment in exporting industries, as measured by the total employment found in this survey.
Ratios to Traded Industry Employment
Looking at the blue trace, over the 10 years to 2000, each person employed in exporting supported themself and another four employed people (1+4=5). Over that period, falling unemployment and rising labour market participation meant that they went from supporting more than ten others (employed, unemployed and outside the labour force) over the age of 15 to about 7 and a half.
Over the following 8 years, property-related borrowings from overseas supplemented earnings from exporting industry, allowing the ratio of total employment in the economy to exporting industry employment to rise from 4.9 in 2000 to 6.4 in 2008. Over the same period the ratio of the total 15+ population to exporting industry employment went from 8.6 to 10.7.
With the onset of the current crisis, the flow of net new property related borrowing ceased, causing a severe shock.
My take is that the sustainable ratio between total employment and exporting industry employment for Ireland is probably about the 5:1 that we saw consistently between 1990 and 2000. The policy challenge then facing us is how to restore this balance as fast as possible, and with a minimum of pain.
From my perspective, the only even marginally palatable way forward is to grow exporting employment rapidly. We can’t keep borrowing at the current rate. And if we rely on each person working in exporting industry to bring in enough to pay for their own imports and those of upwards of 10 others aged 15+, that implies quite a drastic cut in living standards. In terms of the numbers aged 15+ each person working in exporting industry is supporting, we are now back to where we were in the early 1990s, still suffering from the aftermath of the disaster that was Irish economic policy for most of the 1980s.
Which brings us back to competitiveness.
While I am sure there is room for improvement, in broad terms we are already doing what we can on non-cost dimensions to improve competitiveness. If we want to significantly increase employment in exporting industries, we have no choice but to address our cost base.
That means tackling:
- Pay
- Returns to all interests in protected sectors
- Returns to all interests in other sectors with weak price competition
- Returns on property
And on pay, those working in exporting industries should only be first in line where there is a direct problem, both because they have lost out on pay since 2000 and because there is no gain to Ireland in cutting pay where an exporting operation is competitive anyway. The deeper problem is in domestically traded and non-market sectors of the economy. See.
Tags: competitiveness, Labour Market
