Tuesday, January 27, 2009

The Commanding Heights of Stupidity

I'm beginning to wonder if Fintan O'Toole is channelling Michael Foot? Fintan's latest idea for how we get out of the current economic mess is to introduce a maximum wage - he suggests €80,000. And to help things along he wants to introduce price controls, abolish the provision of private pre-school and healthcare services, and get rid of various unnecessary tax reliefs (in Fintan's opinion).

I was reminded by his screed of another, even crazier set of proposals. It was the UK Labour Party's 1983 election manifesto, then led by Michael Foot. It subsequently became known as the longest suicide note in history. The British people, to their credit, ran a million miles from nonsense about 'seizing the commanding heights of the economy' into the arms of Margaret Thatcher. The rest is history, as they say.

The basis for Fintan's proposal is the observation that 'The first step is to recognise that the divisions in the Irish workforce are not between public and private, but between those who are comfortable and those who are struggling.' In this he is completely wrong. In fact, the single biggest division in the Irish workforce is between those employed in the public sector and those (still just) employed in the private sector. As an analysis by Finfacts yesterday points out, quoting ESRI research, the gap between public sector wages and private sector wages in Ireland (the latter being on average 20% below the former) is the highest in Europe. Our politicians are also amongst the highest paid the world.

Worse, as the latest CSO data (pdf) shows, not only did public sector employment expand substantially in the year to September 2008, their average earnings rose by 3.6% over the same period. 369,000 people work in the public sector (including the health services). They enjoy immense job security: it would take an Act of the Oireachtas - and about 2 years of negotiating the generous redundancy terms - to fire a single, permanently employed public sector worker. That's secure. Don't get me wrong: I don't think now is a good time to make a lot of public sector workers redundant - economic confidence is weak enough without a dramatic lengthening in the dole queues. Rather, I'd like to see a reduction in average wages in the public sector by 20% to bring them in line with the private sector, in the interest of social justice and equity of course: we're all in this together - right Fintan? Mind you - if private sector wages fall (as they likely will on average), then 20% is only the start ...

We desperately need new thinking about how to get us out of the current situation. Though it is not the bolshevism-lite of Fintan O'Toole and Cori that we need, but rather something far more ambitious and more likely to succeed. And that is empowering thousands and millions of people to invest their energy, money, time and dreams in building and expanding the businesses that will create the wealth and employment that will secure our future standard of living. As well as generating the incomes and profits that our political masters can then tax to spend so much more effectively than you and I. Michael wouldn't approve, but Margaret would.

9 comments:

  1. You think the Brits were right to run into the arms of Margaret Thatcher and New Labour?

    You must see something good about the creation of a massive underclass and a race to the bottom that others don't.

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  4. Gerard,

    (I'm posting this again to get the full URL's in - if I can...sorry for the mess)

    Also in today's IT is an article by Brian Mooney - that is worth reading:

    http://www.irishtimes.com/newspaper/education/2009
    /0127/1232923366192.html

    Two very worthwhile points that he makes are that:

    (i) All that matters (in terms of the wage debate) is purchasing and power (and following on from that, standards of living)

    (ii) Too much inflexibility will ultimately ruin our standards of living completely

    I'm not sure about the idea for a precise limit of €100,000 p.a. on the salary of the top public servant (the Taoiseach). But the idea of cutting public sector salaries in line with the Consumer Price Index is worthy of some consideration. It may be the closest mechanism that we have to replicate market movements in the public sector.

    My fear about eliminating the public sector wage premium entirely is based on research (by UCD economist Olivier Bargain) which shows that returns to education in public sector employment may be due to selection. That is, in France at least, the public sector "manages to attract better workers in the lower part of the distribution, in part because of non-monetary gains (including job protection), but fails to retain the most productive ones at the top." Here's the paper:

    http://ftp.iza.org/dp3427.pdf

    Basically, the private sector is much more heterogeneous. And if we compare like-for-like individuals (with reference to education and skills) we could find that there is no public sector premium, or perhaps more likely, that the public sector premium is lower than we think.

    However, the above is not an argument against improving job productivity in the public sector, or prioritising spending between public sector wage bills and other public goods. Also, we do know from ESRI researchers Elish Kelly, Séamus McGuinness and Philip O'Connell, that the average public sector wage advantage increased to 20 per cent in 2006, while the pay gap in the rest of Europe rarely exceeds 10 per cent. The ESRI also recommends public sector pay cuts (but not how much), and Kelly et al. "suggest that this may well be preferable to cuts in services and could well yield expenditure savings more rapidly than job cuts through natural wastage, early retirements and redundancy schemes." See story here:

    http://www.irishtimes.com/newspaper/breaking/2008/
    1219/breaking19.htm

    The question remains though - by how much should public sector pay be cut? With concerns about attracting the best (or some of the best) talent to the public sector, one might be reluctant to suggest cuts that are greater than falls in the Consumer Price Index (as mentioned above).

    However, this does not exclude the possibility of new measures to monitor (and perhaps improve) productivity in the public sector. This would give the taxpayer better value for money while also ensuring high standards of public service -- for example, in the Dept. of Finance. This is somewhere that highly skilled individuals must be incentivised to seek employment.

    Tuesday, 27 January, 2009

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  5. Just one more thought. It may even be better to link public sector wages to a private sector wage index. Then public sector wages would not only mirror developments in the cost of living, but also in overall market conditions. Choosing a private sector wage index is the difficult part though. This is the CSO page on earnings statistics:

    http://www.cso.ie/statistics/earnings.htm

    I'm sure it would be possible to compile the series on 'Average Earnings and Hours Worked for Main Categories of Employees' without the public sector component.

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  6. Great follow up Martin - thanks.

    One thought on the public-private sector wage difference is the observation (by some) that comparing differences in the mean of wages in each sector understate the public sector premium.

    The reason is that private sector wages are more widely distributed about the mean (think football players and bank CEOs), whereas public sector wage distribution is more condensed around the mean.

    On the other hand, by comparing median incomes, the wage premium enjoyed by the public sector relative to the private sector is even greater.

    Last thought: the short term agenda has to be curbing the public sector pay bill (for reasons of fairness, not just economics); the medium term agenda has to be about curbing the public sector pension bill - in order to be fair to our children and grandchildren who will be paying it.

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  7. I'm no economist (so I am happily ignorant and sceptical) but re the argument on private versus public sector pay. In relation to professional experts employed in the public sector (engineers, solicitors, accountants, etc)many of them went through the last 10 years watching their private sector colleagues collecting generous bonuses, sharing in windfalls, and generally collecting non-linear benefits. Now that the black swan of economic gloom has landed they want all to stand out in the rain with them. If they wanted the security of the public sector then all they have to do is fill out the form, present for interview in abbey street and hope they get the job. The way the media (and the private sector) portrays the public sector as an amorphous blob suckling at the teat of the private sector for no return is both untrue and a distortion. That's my tuppence worth.



    On a slightly different point, I fail to see how we will get micro decisions to spend and thus revive the economy while this cloud of fear and speculation hovers over us. As you said previously - fear is irrational. I'm a public sector employee - why am I worried about the future? fear - irrational fear but fear none the less - stopping me from 'doing my patriotic duty'!!

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  8. Excellent post (as always), Gerard - is there any hope that the Irish Times would give you a column instead of that economically illiterate twat, Fintan o'Toole?

    Re the 'public/private who takes the pain?' issue, I think we cannot ignore the benchmarking process in deciding what needs to be done now. (By the way, it's simply not the case, as Richard implies, that public sector workers were left staring dolefully at their private sector equivalents as the latter pocketed massive bonuses and the like during the good times: the benchmarking process was put in place specifically to provide the public sector with the sort of rewards that private sector workers were supposedly getting a this time). If the benchmarking process is to be judged as anything other than a complete fraud (and I doubt if it ever will) then it should now be activated again to equalise public and private sector conditions. If it was, that'd sort out the pay cut issue in short order.

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  9. One thing that I did not consider is that public sector pension benefits should be considered as a constituent part of a public sector remuneration premium. And I agree Gerard, that the issue about pension benefits needs to be tackled. The framework to do this may be through the benchmarking process.

    Again, this process was something I did not consider in my previous comment. As JRG said, the benchmarking process was put in place specifically to provide the public sector with the sort of rewards available in the private sector - "If the benchmarking process is to be judged as anything other than a complete fraud (and I doubt if it ever will) then it should now be activated again to equalise public and private sector conditions."

    Equalising public and private sector conditions would reduce the extent of pension coverage in the public sector, and possibly eliminate scheme characteristics such as defined-benefit and links to wage growth. We know from the ESRI research that occupational pension coverage is much lower in the private sector, and that many schemes there are not linked to wage growth.

    http://www.irishtimes.com/newspaper/breaking/2008/
    1219/breaking19.htm

    Rather than linking public sector wages to changes in the CPI or a private-sector wage index (as I previously suggested), the most equitable approach may indeed be to continue with the benchmarking process (assuming it will be fair). This would have the added benefit of addressing the disparity between private sector pension coverage and public sector pension coverage.

    Karl Deeter sums up the logic of the above suggestion quite well in a commnet on the Irish Economy blog:

    "the public sector believe in benchmarking i do too as long as it works in both directions, they wanted increases in the good days, now - without debate- they should accept decreases as everybody else loses out, it is the very spirit of the argument, that of a degree of equality."

    http://www.irisheconomy.ie/?p=506#comments

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