Irish Competitiveness 2016: The little people must wait

Irish Competitiveness 2016: Some of the world's most successful small economies are ranked in the top 10 of the most competitive countries but Ireland hasn't been in this league since the early 2000s.

Switzerland, Singapore, Netherlands, Finland, Sweden, Luxembourg, Norway and Denmark appear in the top 10 of the latest rankings by the World Economic Forum of 144 countries and Switzerland's IMD business school's rankings of 61 countries.

Ireland's ranks are 24 and 16 respectively.

The most competitive countries also have the highest pay when adjusted for price differences and the Irish statistics should be surprising.

In 2014 Ireland had the third highest average annual pay for full-time employees after the United States and Switzerland, among 29 member countries of the Organisation of Economic Cooperation and Development (OECD) — see chart below: Luxembourg is ignored as the number is exaggerated by about a third of its workforce living outside its borders. Four of the 34 OECD members did not provide data.    

The OECD says:

This dataset contains data on average annual wages per full-time and full-year equivalent employee in the total economy. Average annual wages per full-time equivalent dependent employee are obtained by dividing the national-accounts-based total wage bill by the average number of employees in the total economy, which is then multiplied by the ratio of average usual weekly hours per full-time employee to average usually weekly hours for all employees.

Average wages in 2014 in USD PPPs (purchasing power parities) for the US were $57,139; Switzerland $57,082; Ireland $53,286; Denmark $49,589; Germany $43,872; UK $41,659; Sweden $40,994 and France $40,828.

The OECD defines the incidence of low pay as:

the share of workers earning less than two-thirds of median earnings (the midpoint where there is 50% of the sample population above and 50% below).

In 2013 the Irish rate of low pay was 23.3%, third after Estonia at 24% and the US at 25.0%

Besides high and low pay in Ireland (Irish data on the incidence of high pay are not available), pension coverage in the private sector is among the worst in the developed world.

60% of Irish private workers have no jobs pension

There are two distinct economies in Ireland: the foreign direct investment (FDI) exporting sector while about two-thirds of all private sector workers depend on indigenous non-exporting firms.

The FDI and the public sector (government departments, agencies and local authorities) sustain high costs charged by professional firms and the State — the biggest procurer of goods and services — has very limited transparency on procurement, which aids the big players.

The growth in international services promotes clustering by FDI firms in capital cities (or a top commercial city e.g. Amsterdam) of small economies and 2015 research from the Economic and Social Research Institute (ESRI) showed that 70% of new office leases in Dublin in that year had been agreed by foreign firms — mainly in the tech sector.

The FDI firms with the assistance of tax avoidance, tend to be good payers compared with indigenous firms, forcing workers in the latter towards the periphery as rents are hiked.

The FDI and the professional firms also set the standard for senior civil servants and others in the indigenous sector. For example last year an office manager at the Irish Farmers Association (IFA) was reported to have received a €2m severance package on top of his €2.7m pension. The severance deal was to comprise of an upfront payment of €1m, to be followed by €100,000 annually for 10 years.

Ornua (ór nua: new gold in Gaelic), the renamed Irish Dairy Board — which is effectively a marketing agency for dairy co-operatives — this week revealed a 44% hike in directors' fees in 2 years and €9m in pay, bonuses and pension contributions over the last two years for 9 executives who do not have to generally make consequential decisions. These decisions are made in the companies that actually produce the goods.

The Ornua executives struck gold at a time when global dairy prices collapsed.

Also this week the publication of the National Competitiveness Council's 'Cost of Doing Business in Ireland 2016' report highlights various risks to competitiveness.

Prof Peter Clinch, NCC chairman comments in an op-ed in The Irish Times wrote:

Real wage improvements must be underpinned by productivity. It is about keeping costs of living down, supporting people to have affordable places to live near a good job, making sure there is the infrastructure for them to get to work, enjoy their leisure time, be supported by good public services, and have a good quality of life. The successor to the National Spatial Strategy is key.[ ] Addressing the emergence of a range of skills shortages, the relatively large cohort of workers with low skills, and the slide in our university rankings should be policy priorities.

The evidence also shows that effective institutions are a crucial ingredient for a competitive economy. A plan to keep Ireland competitive should be a core objective of any new programme for government, with a focus on clear actionable recommendations, time-bound targets and monitored, transparent implementation.

Even if there was a majority government in charge, there would not be any serious effort made to address the price of land — the main driver of property prices; the incoherent planning system; the developed world's second most expensive health service; the skills deficit among the adult population and the secular poor performance of the indigenous exporting sector.

All the members of the NCC likely have an occupational pension as do ministers, TDs and those with a grip of the public megaphone who are of course not also in the low-pay cohort.

Yet again the non-unionised little people are being urged to be patient but those who can will inevitably grab what they can while the going is good.

Exports not a significant jobs engine for Irish economy

Irish standard of living below EU28, Euro Area and Italian averages

Source: OECD　

From Plato to modern-day fat cats

Plato, the Greek philosopher, is said to have suggested that the incomes of the richest Athenians should not be more than five times greater than those of the poorest citizens.

Peter Drucker (1909-2005), the renowned management expert (he disliked the word 'guru': “I have been saying for many years,” Drucker once said, “that we are using the word ‘guru’ only because ‘charlatan’ is too long to fit into a headline,”) suggested in the 1970s that a limit of 15:1 net tax ratio compared with the lowest net pay of a full-time employee, would be appropriate for most small and medium sized businesses and that with few exceptions even the biggest multinationals should keep within a 25:1 maximum wage ratio.

Drucker wrote in The Wall Street Journal in 1977:

The few very large salaries are being explained by the 'need' to pay 'the market price' for executives. But this is nonsense. It is the internal logic of a hierarchical structure that explains them (— see here ).

As money implies status, in effect the more levels in the organisation, the higher the pay of the man on top.

The Wall Street Journal reported in 2015 that:

In 1965, the leaders of the top 350 publicly (US) traded companies made an average of 20 times what the average worker did, but by 2013 that had ballooned to about 296 times, according to the Economic Policy Institute, a think tank affiliated with labor unions.

Bank CEOs’ pay ratios are well below those of overall corporate America, in part because even middle-tier finance workers are generally well paid. The highest CEO-worker pay ratio among banks in last year was J.P. Morgan’s 160-to-1.

Jaime Dimon no doubt believed that he was worth every cent but John Pierpont Morgan (1837-1913), the robber baron banker who founded J.P. Morgan, reportedly believed that a hired-hand boss should earn no more than 20 times the wage of his lowliest (not median) underling.

In the UK in 2008, Sir Terry Leahy, the Tesco chief who left a mess for his successors, was paid more than 900 times as much as Tesco's average worker.

The Financial Times reported in 2015 that the ratio between the pay of the average FTSE 100 boss and that of the average worker rose to 149 times in 2014, compared with just 47 times in 1998 and 120 times in 2009, according to figures from the High Pay Centre and Manifest — a corporate governance think-tank.

Richard Lambert, former director-general of the CBI and former editor of the FT, said in 2010:

For the first time in history officers of a company can become seriously rich without risking any of their own money. Their rewards are so beyond those of ordinary people that they risk being seen as aliens from another galaxy.