Living on Less Changes in earnings, incomes and employment during the recession
Contents Foreword
2
Summary of main points
3
Introduction
4
Changes in earnings
5
Changes to incomes
9
Income distribution
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Comparing pay and incomes in the public and private sectors
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Employment and unemployment
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Working time
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The cost of living
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Acknowledgements The author would like to thank the Nevin Economic Research Institute, particularly Rory O’Farrell and MichaÊl Collins, Marie Sherlock of SIPTU, the staff of the Central Statistics Office, and Michelle Murphy of Social Justice Ireland. A special thanks is extended to the staff at IMPACT for their contributions and assistance.
Living on Less Changes in earnings, incomes and employment during the recession Noreen Moloney May 2014
Foreword Over the last six years, workers in Ireland have worked hard to bring the country back from an economic collapse that might have ended in catastrophe for our economy and society. They have earned the right to some optimism about the future. Workers did not cause the crisis, but they paid the price as the collapse in the finance, property and other sectors led to mass unemployment, income reductions, and savage budgetary measures to get the public deficit back under control after the tax base collapsed. By necessity, IMPACT and other unions have adopted defensive positions over the last half decade, working both to minimise and to shape the measures imposed on workers and their communities. The austerity policies imposed by international institutions and adopted by successive Irish governments have slowed the journey to recovery. But now, although we remain realistic, all the indicators tell us that Ireland is returning to growth and that our budgetary targets will be met. We are experiencing a recovery, albeit slow and fragile. This paper does not attempt to predict the size and shape of recovery, or to outline how the fruits of recovery should be shared. Rather, it sets out factually what has happened to earnings and incomes and jobs during the recession, in order to inform the debate about what should happen next. IMPACT is determined that our members and other working people will get their fair share of the fruits of recovery, along with their families and communities. We will continue to push hard for real measures to deal with unemployment – especially youth and long-term joblessness – and for a concrete path to better public services and income recovery for ordinary workers. Shay Cody IMPACT general secretary
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Summary of main points •• There are forecasts of a return to significant growth in the economy with GDP expected to grow by 2.0% in 2014, increasing to 2.8% in 2016. •• The CSO has reported that, over the five years to December 2013, average weekly earnings decreased by 5.1% in the public sector. Average hourly earnings fell by 5.4% in the same period. These figures do not include the so-called pension levy, which has further reduced public service pay by 7% on average. •• Over the five years to December 2013, average weekly earnings in the private sector fell by 3.4%, while average hourly earnings were stagnant. Reductions in available paid working hours is the most likely cause of the large disparity in changes to the private sector average weekly and hourly earnings. •• Increases in taxes and state charges have added to income decline. CSO figures show that average disposable household income fell by just over €8,500 between 2008 and 2012. •• The average effective direct tax rate for Irish households increased from 12.8% to 13.5% between 2007 and 2010. This rises to just over 24% when indirect taxes are added. •• During the recession, unemployment rose from under 5% and peaked at just over 15%, before falling to 11.7% in April 2014. •• The average number of paid working hours fell by 2.5 in the five years to December 2013, despite increases in some sectors. •• Economists in Ireland and abroad disagree on how to measure differences in pay in the public and private sectors. However, the CSO says that, regardless of how it is measured, any ‘public service pay premium’ has fallen significantly since 2007. •• The OECD finds the cost of paying Irish public servants is broadly in line with the EU average. •• Although inflation (as measured by the CPI) declined slightly between 2008 and 2013, the cost of essential living items such as health, transport and education has increased significantly.
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Introduction Since the effects of the economic crisis began to be felt in 2008, virtually all incomes have fallen or, at best, remained static. There are variations between different sectors, and some have seen increases in hourly and weekly earnings. Nevertheless, experience of reduced or static earnings, combined with increased taxes and charges and a high cost of living, have resulted in lower real disposable incomes for most people. However, the departure of the troika, more positive fiscal and economic indicators, and forecasts of an export-led recovery have given rise to expectations of a halt to these trends and some recovery in living standards. There is evidence of change already occurring. The 2014 Budget had a significantly lighter impact on incomes than previous budgets. Predictions of recovery are based on forecasts of increased GDP and a decrease in the general government deficit. Official Government figures forecast that real GDP will increase by 2% in 2014. This pattern of positive growth is predicted to continue up to 2016, putting the increase in GDP at 2.8% in 2016. Alongside this, the Government predicts it will meet EU budgetary targets by 2015, reducing the general government deficit to 2.9% of GDP in 2015 (below the European target of 3%). These developments have spurred an emerging debate on future pay and income rises in the context of a sustained, albeit slow, recovery. There is also evidence of significant recent pay movement in the private sector, with pay increases negotiated in sectors as diverse as retail, information and communications, professional and technical areas, and construction.1 According to the respected journal Industrial Relations News, local pay bargaining is expected to increase further in 2014 “although the big question is to what extent it will spread beyond the high value-added multinationals in which it has already become well-established.”2 Productivity measures and/or changes in pay structures have been a regular feature of successful pay bargaining in the private and commercial semi-state sectors. A debate is underway, in politics, business and the media, over how the fruits of economic recovery should be allocated. Although many businesses are now increasing wages, business representative groups are at best cautious and at times opposed to pay recovery. Influential political voices are already making the case for tax reductions as opposed to recovery in pay, and public spending and the services it supports. On the other side of the argument, the Irish Congress of Trade Unions is developing its ‘decent work’ campaign to encompass the issue of pay and income recovery. Its approach will likely be informed by the need to restore the value of statutory wage protections including the national minimum wage and the JLC/REA system, as well as collective bargaining including the ‘living wage’ concept. ICTU’s campaign has already delivered the restoration of the statutory minimum wage rate and the reinstatement of six Joint Labour Committees (JLCs), which set minimum pay and other conditions for tens of thousands of workers in low paid sectors. This paper sets the scene for IMPACT policy development in this area. Drawing on existing research and data, it outlines changes in earnings, incomes and employment over the period of the recession. It also examines the re-emerging debate on pay differences between the public and private sector. It is intended that this paper will inform policy debates and decisions at IMPACT’s biennial delegate conference in May 2014.
1
Colman Higgins and Andy Prendergast, ‘Private sector wage settlements averaging 2% over full year,’ Industrial Relations News, IRN06, 12th February 2014.
2 Colman Higgins, ‘Local pay deals to be more widespread, but by how much?’ Industrial Relations News, IRN01, 8th January 2014.
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Changes in earnings Earnings play a variety of roles in the economy. On an individual level they are the most important source of income for most people. In economic terms they represent the price of labour and are a way of aligning the demand and supply of labour. They are a key factor in production costs and, as the main source of income, they sustain consumption and aggregate demand in the economy.3 As in other periods of fiscal consolidation, employers have cut their wage bills in different ways over the past five years. Generally, it has been done in one (or more) of the following ways: 1 Reducing the level and/or changing the composition of the workforce 2 Reducing the hours worked by employees and/or reducing the incidence of, or payment for, overtime and other premium rates 3 Cuts in pay rates. In its role of employer, the State can – and has, through the introduction of the so-called ‘pension levy’ – also used taxation measures to effectively reduce its pay bill and, subsequently, the incomes of its staff. More general changes to taxes, charges and benefits (including social welfare rates and eligibility, state pensions and related payments, and benefits to people in employment) have also had a significant impact on incomes. Although there are examples of (occasionally large) pay rate reductions in the private sector since the onset of the recession, most studies show that average private sector pay has been relatively stable compared to the public service. This does not necessarily imply that the adjustment in the private sector has been less severe. In the public sector, pay cuts (including the imposition of the so-called ‘pension levy’) were the main vehicle for reducing pay costs, along with significant employment reductions on a voluntary basis. In the private sector, the main vehicle for reducing wage bills was compulsory (and other) employment cuts, reductions in paid working time, along with some pay reductions. So, while private sector workers who remained in employment experienced relatively minor pay adjustments on average, those who became unemployed suffered large – and even catastrophic – reductions in income.
3
Eurofound, ‘Pay in Europe in the 21st century,’ 2013.
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The trouble with averages Everybody’s individual circumstances and experiences are different when it comes to pay and incomes. So vastly different, that it’s impossible to understand what’s generally happened to pay and incomes by relying on the stories of every individual. That’s why we rely on average figures to organise vastly different experiences into something that can paint an overall picture capable of informing policy decisions. Average figures tell us that virtually everybody’s income has declined during the recession. But this masks big differences in the experience within and across sectors, communities and households. Averages can’t tell the whole story about how people have been hit by the recession either because, again, people’s circumstances are very different. An individual who has finished paying for the house, and has seen their children through education, is in a vastly different situation to someone with a big mortgage and three kids in school – even if they earn the same salary and pay similar tax.
Changes in earnings 2008-2013 Averaged across the whole economy, annual earnings fell by 1.9% (from €36,796 to €36,079) between 2008 and 2012.4 A larger fall of 4.6% in average weekly earnings occurred in the five years from the fourth quarter of 2008 to the same quarter in 2013.5 Across the five years to December 2013, hourly earnings decreased by 2.2% (from €22.17 to €21.69). The differences in weekly and hourly earnings are significant as they reflect the effect of increases or decreases in working hours. If paid working hours are cut and hourly earnings remain the same, weekly earnings will decrease. Conversely, if the number of hours worked increases and weekly (or annual) earnings remain the same, then hourly earnings fall. It is important to note that these figures measure earnings rather than incomes; they do not take account of changes to taxes (including the so-called public sector pension levy), government charges or benefits. Changes in all of these have further reduced incomes. This is addressed below. Neither do the earnings figures take account of the cost of living, which is also addressed below. The overall averages mask marked differences in different economic sectors. For example, the information and communication sector saw substantial increases in weekly earnings (5.9%) in the five years to December 2013, the accommodation and food sector saw a decrease in annual wages (10%), while human health and social work activities saw the largest cuts in weekly earnings (11.5%). The largest decrease in hourly pay rates was seen in areas dominated by the public sector, the largest in human health and social work (9.9%). In comparison, the information and communication sector saw the largest increase (4.2%).6 The overall averages also mask different pay movements in the public and private sector. Average weekly earnings in the public sector decreased by 5.1% in the five years to December 2013. There was a larger decline of 5.4% in hourly earnings in the sector.7 However, these figures do not include the so-called pension levy, which reduces public sector pay by a further 7% on average. The private sector has seen a smaller decline in average weekly earnings than the public sector (3.4%). Hourly average earnings in the private sector were at the same level at the end of 2013 as they were five years earlier. This suggests that the form of income reduction in this sector (aside from job losses) has primarily been through reduced working time. 4
Average annual earnings are based on the CSO data for total wages and salaries. They include the gross amount (ie before deduction of income tax, employee contributions to social security, employee contributions to pension schemes etc) of all wages, salaries, allowances, commissions, bonuses, and holiday pay. Data taken from CSO Earnings, Hours and Employment Costs Survey (EHECS), Table EHA05.
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Data for hourly and weekly earnings is taken from the CSO Earnings, Hours and Employment Costs Survey (EHECS) which covers all sections of the economy other than agriculture, forestry and fishing (from Table EHQ03). The EHECS replaced the CSOs four-yearly labour costs survey and all its short-term earnings inquiries from Q1 2008.
6
Data taken from CSO EHECS Survey, Table EHQ03.
7
Data taken from CSO EHECS, Table EH108.
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Reductions in earnings fell unevenly over the 2008-2013 period. From 2008 to 2009, annual earnings increased marginally by 0.1% while average weekly earnings decreased by 0.4%. The following year (2010) saw decreases in both annual (1.9%) and weekly (2.2%) earnings. This was the largest annual decrease in weekly earnings over the five year period and occurred in the year that cuts in public sector pay scales were imposed by legislation. Annual and weekly earnings continued to decrease in 2011 when the largest fall in weekly earnings was in the construction sector and the largest increase in professional, scientific and technical activities. In 2012 average annual earnings began to increase again, by 0.5%. Preliminary estimates show that earnings fell again in 2013, the year in which 13% of public servants saw further (temporary) cuts in their pay. Overall, average weekly earnings were down 0.6%, and average hourly earnings fell 0.9% in the year to September 2013.8
Earnings changes for different occupations Completely accurate information on the changes in hourly wages for different occupational groups is not available. However, data from the CSO’s Earnings, Hours and Employment Costs (EHEC) survey show that weekly earnings for the three highest paid occupations (managers, professional and associated professions) increased in the three years to September 2013 (from €1,073 to €1,152).9 In the same period, weekly earnings for clerical, sales and service employees increased from 2010 to 2012, but decreased again to reach €468 in September 2013. Production, transport, craft and other manual workers also saw fluctuations as average weekly wages, which increased to €539 in 2012 but decreased to €485 by September 2013.10 Being a member of a higher-paid occupational group does not necessarily guarantee a high wage because earnings are also determined, to a significant degree, by the sector in which a worker is employed. For example, managers, professionals and associated professionals working in the accommodation and food sector – the lowest paid sector in the economy – earned an average of €18.88 an hour, well below the average hourly wage of €22.11.11 Clerical, sales and manual workers in the accommodation and food sector earn around half the national average.
8
The most recent CSO figures show earnings for September 2013 and preliminary estimates for the fourth quarter of 2013.
9
Data taken from CSO EHECS, Table EHQ13. The change in earnings is calculated from the third quarter of 2010 to the third quarter of 2013 as this is the most recent data available.
10 Data taken from CSO EHECS, Table EHQ13. The change in earnings is calculated from the third quarter of 2010 to the third quarter of 2013 as this is the most recent data available. 11
Rory O’Farrell, ‘The Irish labour market since the recession,’ NERI Working Paper No.11, December 2013, p.11. O’Farrell uses data from CSO EHECS, Table EQH03.
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The community and voluntary sector Most organisations in the community and voluntary sector have experienced significant funding cuts during the recession, and this has impacted on jobs, services and pay. A report by independent researcher Brian Harvey, which was commissioned by the ICTU Community Sector Committee with support from IMPACT and SIPTU, found that the sector had suffered a 35% contraction, with an estimated 11,000 job losses by the end of 2013. The report estimated that a further 5,500 jobs will go from the sector by the end of 2015. An earlier Harvey report, commissioned and published by IMPACT’s Boards and Voluntary Agencies branch in 2010, estimated a loss of 5,000 jobs at the end of that year, which was 10% of the sector’s workforce. Harvey found that most organisations tried to absorb cuts, with staff in most organisations suffering reduced working hours or pay cuts similar to the 2009 public service reductions. His reports criticised the arbitrary nature of funding cuts and said the level of contraction went beyond what has happened elsewhere in Europe.
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Changes to incomes Incomes and earnings are not the same thing. Your income is the amount of money you actually take home after paying taxes and charges, and after receiving benefits and other non-pay income. The Nevin Economic Research Institute (NERI) describes three types of income:12 1 Direct income, which means earnings plus any investments 2 Gross income, which is direct income plus any social transfers like child benefit or pensions 3 Disposable income, which represent gross income minus taxes and social insurance contributions – the amount of money you actually have to spend or save. Between 2004 and 2008 average household incomes increased by almost 27% to just over €49,000. This reflected increased earnings, enhanced welfare payments and lower direct taxes. However, average nominal disposable income fell by 17% from just over €49,000 to just over €40,500 in the four years to 2012.13 The average level of household disposable income can be distorted by households with very high or very low incomes. Therefore, data for the median household is also useful, although the most recent data is for 2009. This shows a disposable income of €38,255 for the ‘middle household’ in Ireland in 2009.
Tax and welfare changes Taxes and government charges raise revenue for the provision of public services and also create the capacity to redistribute income, including through the benefits system. The amount of tax collected can be expressed as a share of gross domestic product (GDP).14 Tax-to-GDP ratios fell in most OECD countries between 2007 and 2011. However, on average total general government revenues as a share of GDP are expected to be slightly higher in 2014 (43.5%) than in 2008 (43.2%). Ireland’s tax-to-GDP ratio is substantially lower than the OECD average. It peaked at 32.1% in 2006 but by 2011 it had fallen to just 28.9% – the second lowest in the euro area. During the economic crisis, increased taxes also contributed to fiscal consolidation, bringing exchequer income back closer to spending levels. The most significant measures were the widening of the social insurance tax base, the introduction of the universal social charge at a higher level than the income levies it replaced, the imposition of the so-called ‘pension levy’ on public servants, increased excise duties and vehicle registration and motor taxes. New utility and local charges are also reducing disposable incomes. Using CSO data, it is possible to examine the scale of income tax paid by households and individuals with different levels of income.15 This is done by calculating an ‘effective’ taxation rate, which compares the total amount of income taxes (including social insurance) with total gross income. For example, a household with a gross income of €50,000 that pays a total of €10,000 in income taxes and social
12 Micheál Collins, ‘Income Distribution, Pre-Distribution and Re-Distribution,’ NERI Research in Brief No.5, August 2013. P.3. 13 Calculated from data in the CSO SILC, NERI Spring Facts and the SILC April 2014 release. 14 GDP is an estimate of the total value of all goods and services produced within a country in a given year and is generally regarded as an appropriate measure of the tax base. Using GDP as the tax base, Ireland had one of the lowest tax burdens in the EU27 in 2011, the most recent year for which outturn data are available. Brendan O’Connor, ‘The structure of Ireland’s tax system and options for growth enhancing reform,’ The Economic and Social Review 44, No. 4 (Winter 2013), p.513. 15 The latest income distribution data for Ireland comes from the 2011 CSO Survey on Income and Living Conditions (SILC), released in 2013. This survey is part of a Europe wide household living standards survey and collects income and living standards information from a representative national sample. In 2011 the dataset comprised responses from 11,005 individuals in 4,333 households. The data includes a probability weight variable to correct for under representation and non response. The collected income data is reconciled by the CSO with tax records in an attempt to ensure its accuracy.
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transfers has an effective taxation rate of 20%.16 The average effective tax rate for Irish households increased from 12.8% to 13.5% between 2007 and 2010.17 Households also make indirect tax contributions through VAT, excise duties, levies and local taxes and charges. NERI found that in 2009-2010 (the most recent available figures) Irish households contributed 13.5% of gross income in direct taxes and 10.3% of income in indirect taxes; a total average tax contribution of just over 24% of gross household income. Unsurprisingly, the amount of consumption taxes collected has fallen during the economic crisis. They accounted for just over 10% of GDP in 2011, below the EU-27 average of just over 11%. VAT, which is the largest source of indirect taxation, collected an average €3,360 a year – or 6.27% of average gross income – from households. Nevertheless, Irish VAT receipts are the second lowest in the EU (after Spain) as a percentage of GDP.18 Tax generated from labour accounted for almost 42% of government tax revenue (or 12% of GDP) in 2011. The EU-27 average was slightly less than 51%, or almost 20% of GDP. Irish taxes on capital fell to an historic low of 6.3% of GDP in 2009-2010 and increased only slightly to 6.7 % of GDP in 2011. Department of Finance projections for 2014 predict that income tax will account for almost 40% of taxation revenue, with less than 9% coming from corporation taxes. Before the recession, governments narrowed the tax base and became increasingly reliant on transitory taxes, particularly stamp duty on property transactions. As a result, the collapse of the finance and construction sectors in 2008-2009 had a huge impact on exchequer income. In 2009 the then-Government introduced a levy on gross income of 1% on annual income up to €100,100 and 2% on income over that. In the emergency budget of April 2009 income levy rates were increased; 2% was charged on income from €75,036 to €174,980 and 6% was charged on income above that. There was an exemption for the first €15,028 of annual income and a higher exemption of €20,000 for people aged over 65. In 2009, the health levy was also doubled to 4%, and 5% for incomes above €75,036. Universal child benefit was reduced by 10% between 2008 and 2010, though a more targeted form of child income support was introduced. Jobseekers allowance for those aged between 18 and 21 was reduced to €100 per week. The so-called public service ‘pension levy’ was introduced in 2009. This deduction affected net pay, although the first €15,000 of annual earnings was exempt. A tax of 5% was imposed on the next €5,000 of earnings, 10% on earnings between €20,000 and €60,000 and 10.5% on earnings above €60,000. The universal social charge (USC) was introduced to replace income and health levies in Budget 2011. The USC has a broad tax base; unlike income tax and PRSI, almost everyone is liable to pay it. Only those who earn less than €10,036 are exempt. Those who earn more pay 2% on the first €10,036 of earnings; 4% on the next €5,980; and 7% on the balance. Self-employed taxpayers face the same standard rates except that incomes above €100,000 attract a 3% surcharge.19 The introduction of the USC reduced the top marginal tax rates for workers and the self employed by 4%. The marginal tax rates for the income and health levies were 6% and 5%. At the same time the PRSI ceiling was abolished and the top marginal rate for PAYE earners (excluding the self-employed) increased to 52%, where it currently remains.
16 Definition taken from http://www.nerinstitute.net/download/pdf/income_taxes_and_income_tax_options_neri_wp_sep_2013.pdf page 8 uses the CSOs Survey on Income and Living Conditions (SILC) data to examine the scale of the income taxation paid by households. 17
Calculated using NERI microeconomic model and based on micro data from CSO’s 2011 Survey on Income and Living Conditions. Michaél Collins, ‘Income taxes and income tax options: A context for Budget 2014,’ P 7.
18 Eurostat, European Commission, p 97. 19 The surcharge was introduced in the aftermath of Budget 2011. Because there was no PRSI ceiling for the self-employed their marginal rate reduced at 51%. This would have resulted in a tax reduction for self-employed earners of over €200,000. To counteract this, the self-employment rate of PRSI was increased from 3% to 4% and a surcharge was introduced for self-employment income in excess of €100,000. This restored the self-employed marginal tax rate to 55% (41% income tax, 4% PRSI, 7% USC and 3% USC surcharge). There is a tax cut due to self-employed earners of more than €100,000 at the end of 2014 (Budget 2015).
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Employees pay PRSI at the rate of 4% on all earnings if they earn over €352 per week. In Budget 2011 changes were introduced for both self-employed and employees. The employee PRSI ceiling of €75,036 was abolished, with the result that, since 2011, employee PRSI is payable on all employment income. The rate of PRSI for the self-employed increased from 3% to 4%. The abolition of the weekly PRSI-free allowance in 2014 means that employees who earn over €352 a week pay PRSI on all of their earnings. This means that their income fell by €5.08 a week or €264.16 a year. From 1st January 2014, employers contribute 8.5% for all jobs that pay up to €356 per week. This employer rate was halved to 4.25% from 1st July 2011 and was restored to 8.5% from 1 January 2014. An employer pays 10.75% on an employee’s earnings over €356. Modest rate increases were applied to capital gains, capital acquisitions and interest earned on savings and investment products.
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Income distribution The most comprehensive data on income levels is the CSO Survey on Income and Living Conditions (SILC). It should be noted that this survey measures household income, rather than individual income.
Disposable income distribution Disposable income is gross income minus taxes and social insurance contributions. In 2011, 50% of households had an annual disposable income of less than €35,000.20 Those towards the bottom end of the income distribution scale had an income of €26,000 a year or €500 a week (34% of households). At the opposite end of the scale, the top 10% of households had an annual disposable income above €77,000, whilst the top 1% had annual household incomes of more than €135,000. In 2011 the mean disposable household income was almost €42,000 a year and the median was €35,216 – equivalent to €805 a week and €675 a week respectively.
Gross income distribution Gross income is direct income plus social transfers like child benefit and pensions. In 2011, average gross income was almost €53,000. However, more than 60% of households had an income below the average and approximately 250,000 households had an income of less than €15,000. These households were generally single-person and reflect the problems of using households as a measure of incomes. At the top of the scale approximately 2% of households (28,000) had a gross income of more than €200,000 a year. There is a large difference in the income of the top 10% of households, which account for nearly a quarter of all disposable income, and the decile immediately below it. Redistribution through taxation and welfare decreases the scale of these initial divides across incomes, although the stark difference between the ninth and top decile is still present. In 2011, the postredistribution share of total disposable income for the bottom 50% of households (25.05%) was almost the same as the share of the top 10% (24.85%). The top 10% of households receive 38% of all market income, 30% of all gross income and one quarter of all disposable income.
20 Disposable income represents the amount of money a household has to spend after tax and social transfers. See definition above.
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Comparing pay and incomes in the public and private sector Comparing public and private sector pay and earnings is not straightforward and economists in Ireland and abroad disagree on how to measure differences across the two sectors. When assessing comparisons between public and private sector pay, care is required to understand exactly what is – and is not – being compared. Virtually all studies quoted in this contentious debate are comparisons of average earnings in two highly varied ‘sectors,’ weighted in some way to take account of qualifications, educational attainment, age and/ or other factors. Virtually none are direct comparisons of the pay of people doing the same or similar work (or jobs of a similar ‘size’ in terms of roles, responsibilities, value, and educational or professional qualification) in the respective sectors. This is partly because wide differences in pay and reward structures in different organisations (public and private) make such direct comparisons extremely difficult. Instead, most comparisons are of average public-private wage differentials. These can vary dramatically as a result of (i) the method of analysis (ii) the data sample chosen for analysis (iii) how researchers decide to adjust for bias in data samples and (iv) whether and how researchers account for relevant pay determinants like qualifications, educational attainment, experience, age, or size of enterprises. One of the most contentious questions in the debate has been whether or not to weight pay data to take account of the size of enterprise. This makes a huge difference to the outcome of public-private pay comparisons as most public service employers are large, and workers in most large private sector employments earn significantly more than workers in small private sector employments.
What’s being compared? Questions to ask when looking at a public-private ‘pay’ comparison: •• Is it comparing pay rates, earnings or incomes? •• Does it take account of the ‘size’ of jobs (qualifications, roles, responsibilities, etc)? •• What time period is being compared? •• Does it take account of the so-called ‘pension levy’ or other variations in tax or benefit eligibility? •• What data and methodology are being used? •• Does it take account of the total reward package or just pay? •• Is it a comparison of pay rates or pay movements? All about timing The time at which pay is compared also helps determine the outcome of any comparison. For example: •• A comparison based on data from before January 2010 does not take account of across-the-board public service pay cuts, which averaged 7%. •• A comparison based on data from before January 2011 does not take account of a further across-theboard pay cut of 10% for new entrants to the public service. •• A comparison based on data from before July 2013 does not take account of further significant pay cuts for public servants who earn over €65,000 a year. The same would be true when capturing significant pay movements in the private sector.
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Pay and incomes The outcome of public-private comparisons also depends on whether you compare pay or incomes. This is because the tax and benefits systems that apply to public and private sector workers differ. When compared to private sector workers, public servants in Ireland pay an additional tax, which averages around 7%, in the form of the so-called ‘pension levy.’ They could have the same pay as a ‘comparable’ private sector worker, but their income would be 7% less on average. They could earn 7% more than a ‘comparable’ private sector worker, but have the same income after tax. Pay and pay movements It is also important to distinguish comparisons of pay rates (how much people are paid) from comparisons in pay movements (how much their pay has increased or decreased) over a given period. Both are of interest, but they are different things. For example, if worker A earns half as much as comparable worker B, and their pay increased by 5% more than worker B’s last year, they are still underpaid in relation to worker B. Like pay rates, the significance of pay movements should be assessed in light of the time periods under comparison. For example, a comparison of pay movements in the year to January 2013 will not capture the fact that public service pay rates were reduced in January 2010 (and that pay for new entrants was reduced again in 2011) as these pay movements will have been washed out of the figures. Neither will it capture additional pay cuts for some public servants which came into force in July 2013. Pay structures Pay structures can have similar effects. Incremental pay scales are far more common in the public than the private sector. As a result, statistics can show pay ‘increases’ even after pay cuts have been imposed. If my pay is cut substantially in January 2010 and I receive a small increment in February 2011, standard statistics will show that my pay rose in the year to February 2012, even if it remains far below the January 2010 rate. Increases and decreases in overtime and premium rates, and the availability of overtime work, can also have a significant impact on earnings in both sectors. The payment of bonuses and performance-related rewards, which are far more common in the private than the public sector, can have similar effects. International comparisons Unsurprisingly, international comparisons are even more difficult to make as pay and reward structures, the ‘size’ and content of jobs (including jobs which, on the face of it, seem directly comparable), and tax and benefits systems vary even more widely. Crucially, most international studies do not take account of the cost of living either.
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Recent research A comprehensive October 2012 Central Statistics Office (CSO) analysis of public and private sector earnings21 in Ireland showed that, regardless of how you measure it, any pay premium for public sector workers fell significantly between 2007 and 2010. The figures take account of the January 2010 public service pay cuts, but not the additional cuts to new entrants’ pay introduced in 2011 or the July 2013 pay reductions for public servants who earn over €65,000. Because they are based on gross earnings, the figures significantly overestimate the pay gap because they do not take account of the so-called ‘pension levy.’ Importantly, the CSO study acknowledges that economists in Ireland and abroad disagree on how to measure differences across the two sectors. Unlike earlier reports by the Economic and Social Research Institute (ESRI), the CSO published results from a variety of models and tests. Its report shows a very broad range of estimates, all of which demonstrate a measurable reduction in the pay gap regardless of the methodology used. Depending on how the gap is measured, the report found that the pre-pension levy public service pay ‘premium’ ranged from 6.1% to 18.9%, but that the gap was significantly different for men and women. The pre-pension levy pay premium for men ranged from 2.3% to 16%, depending on how the gap is measured. The pay premium was wider for women at between 9.2% and 21.5%. Factoring in an average ‘pension levy’ of 7%, the net public service premium is minus (-) 0.9% to plus (+) 11.9% overall. For men, it is minus (-) 4.7% to plus (+) 9%. For women it ranges from plus (+) 2.2% to plus (+) 14.5%. The study produces aggregate figures and does not attempt to compare the pay of specific jobs with similar skills and education requirements, experience or levels of responsibility. The CSO results show that, on average, public service workers have higher educational attainment, longer service, are older, and are more likely to be in professional jobs than their counterparts in the private sector. These remain the most significant factors in explaining any premium in public sector pay.
International comparisons In September 2012, the IMF reported that the Irish public service pay bill was equivalent to 11.2% of GDP compared to an average of 11.1% for OECD countries who are members of the EU.22 These figures do not take account of the so-called ‘pension levy’ which reduces Irish public servants’ pay by an average of 7%. In other words, these figures show that the Irish public service pay bill is roughly in line with comparable EU countries as a percentage of GDP even before you deduct the so-called ‘pension levy’. The OECD’s Government at a Glance, 2011, which compares international public sector labour costs, found only two groups in Ireland – hospital consultants and top central government managers – were paid above international standards.23 (Both have experienced significant pay reductions since the study was published). In general, the OECD says that the cost of employing Irish public servants is about average. Research conducted for IMPACT also shows that certain large groups of Irish public servants – including clerical officers and primary teachers – are paid less than their German counterparts at every stage of their careers, even though the cost of living was 17% higher here at the time the research was conducted.24 The study compared the pay of certain public service grades in Ireland and Germany. It did not take account of an agreement that is increasing German public service wages by 6.3%. 21 Central Statistics Office, National Employment Survey 2009 and 2010 Supplementary Analysis, 12th October 2012. This is the most recent CSO analysis of public and private sector earnings. It is understood that a similar analysis may be carried out in 2014. 22 Note, this relates to the total pay bill and is not a measure of pay rates alone. The pay bill is determined by the number of public servants and by their pay rates. 23 Government at a Glance 2011, OECD, 24 June 2011. This is the most recent issue of the OECD’s Government at a Glance that includes data for Ireland. Pay for Irish hospital consultants and senior civil servants has fallen again since this survey was undertaken. 24 Ciarán Lyng, A comparison of public service pay rates in Germany and Ireland, IMPACT, August 2012.
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Employment and unemployment The OECD calculates that the share of working-age people in employment in Ireland is just below 60%. This is the seventh lowest among 34 OECD countries. Even though employment is growing again, the number of people in work still remains 250,000 lower than in 2008 and a substantial number of people who want to work full-time are in part-time employment. More than one in six Irish adults lives in a household where nobody works, a figure that has nearly doubled as a result of the economic crisis.25 The number of people in employment peaked in the first quarter of 2008. It was 11.8% lower by the end of 2013, although the number of people in employment rose in each of the five quarters to December 2013 and increased by 3.2% - or just under 60,000 – in the year to December 2013.26 There are three factors that explain the job losses in the labour market during the recession: 1 The general downturn in the economy 2 A once off adjustment when the construction bubble burst (almost 53% of construction jobs were lost in the five years to December 2013).27 3 A longer-term shift in the labour market, which is reducing the number of middle-paying jobs.28 The general economic downturn posed the biggest threat to low-paid jobs. From 2008 to 2010 employment in the highest-paying occupations was stable while low and middle-paying occupations saw job losses. The largest job losses were in middle-paying occupations, not least because construction jobs tended to be middle-paying.29 The last 20 years have seen a global polarisation of the labour market, with increased employment in both high and low skilled occupations and a decline in middle occupations. The construction boom masked these trends in Ireland but, since the recession, polarisation has become apparent. Employment and wages have increased for those at the top, middle-paying jobs have declined, and there have been increases in the number of low-paying jobs. For example, the information and communication sector saw the largest increase (17.6%) in numbers employed in the five years to the end of 2013.30 Employment also increased by over 13% in the lowest paid sector, accommodation and food.
Unemployment Unemployment increased rapidly during the crisis from below 5% to a peak of over 15% in 2012. However, we are now witnessing a slow but welcome decline in the live register and the standardised unemployment rate (SUR) stood at 11.7% in April 2014. Nevertheless, the ratio of unemployed people to job vacancies also remains high at 26% in the second quarter of 2013.31 The higher the ratio, the less opportunity unemployed individuals have to find employment.
25 OECD, ‘Society at a glance: The crisis and its aftermath,’ March 2014, highlights for Ireland available at http://www.oecd.org/ireland/ OECD-SocietyAtaGlance2014-Highlights-Ireland.pdf 26 Calculated using seasonally adjusted data from the CSO Quarterly National Household Survey (QNHS) table QNQO3. Seasonally adjusted data is data that has been treated for calendar effects, seasonal variations, etc. The seasonally adjusted factor is revised each quarter for all previous quarters. 27 Seasonally adjusted figures calculated from QNHS Table QNQO3. 28 Rory O’Farrrell, ‘The Irish labour market since the recession: Lifting the veil on long term trends,’ NERI working paper No.11, December 2013, p.2. 29 Ibid, p.16. 30 Seasonally adjusted figures calculated from QNHS, table QNQ03. 31
Two sources are used for this indicator: The EU job vacancy survey and the Labour Force Survey (both undertaken by Eurostat). NERI Spring Facts, Spring 2013, p 34.
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There were 253,200 people unemployed in the fourth quarter of 2013, which is a decrease of 14.1% in the year (41,400). The unemployment rate for 15-24 year olds also decreased from 27.7% to 24.2% over the year to December 2013.32 The seasonally adjusted unemployment rate for the EU-28 was 10.8% in November 2013, compared to the estimated seasonally adjusted rate of 12.1% for Ireland for the fourth quarter of 2013. Despite falling from 8.2% to 7.2% in the year to December 2013, long-term unemployment (the number of people out of work for a year or more) remains unacceptably high. Long-term unemployment accounted for 61.4% of total unemployment in December 2013, compared to 59.9% a year earlier and 62.5% at the end of 2011.33
32
CSO QNHS release for the fourth quarter of 2013.
33
Ibid.
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Working time Decreases in the amount of available paid working time can have a significant negative impact on incomes and the length of the average working week has been declining. In the five years to the end of 2013, the average number of hours worked decreased by 2.5 (from 32.5 to 31.7) a week. Workers in public administration saw the biggest increase (2.3%) in hours worked, which reflects increased hours introduced under the Croke Park and Haddington Road agreements. However, different sections of the public service saw varied changes to their working hours. Education saw the biggest decrease in paid working hours (-5.6%) across all sectors in the five years to December 2013. As the working hours of many education staff have increased, this decline probably reflects an increase in parttime, contract and causal work in secondary and third-level teaching and research. The average figures mask a growing trend towards fragmented working time, including zero-hours contracts where staff must be available for work but employers do not guarantee any hours, in certain sectors of the economy. Figures on the prevalence of the use of zero-hours contracts in Ireland are not available. However, a recent membership survey by Mandate trade union found that, while 70% of retail workers surveyed had worked in the industry for over five years, only a third had full-time contracts. Half said their hours were changed at least once a month and only a third had stable working time arrangements.
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The cost of living Changes in inflation and the prices of everyday items also impact directly on the real value of earnings and incomes because they determine what your disposable income can buy. In the five years to 2013, there was a decrease of 0.8% in the cost of living based on the annual average change in inflation, as measured by the Consumer Price Index (CPI). But, like the average pay figures, the overall CPI figure mask large variations in price movements. Average annual inflation increased by 4.1% in the year to 2008. However, from 2008 to 2009 the average annual CPI figure decreased by 4.5%. Between 2010 and 2013, average annual inflation was 4.8%. In order to remain consistent with the data on wages, changes in inflation can be calculated using averages of the change in inflation during the months of the fourth quarter of 2008 to the same period in 2013. During these five years the CPI decreased by 1.1%. The largest decrease was in clothing and footwear where prices dropped by 22.4%. Other items such as housing (including rent and mortgage interest rates) decreased by 11.7%. However, there were increases in essential living items such as transport (8%) and health (8.1%). The largest increase was seen in education where prices increased by 29.1%. From January to March 2014 the average cost of living increased by 1.2%. Transport increased by 2.3%, and the largest increase (9%) was in clothing and footwear. Housing costs are also rising now. It is also worth noting that the CPI simply measures the extent to which average prices have gone up or down. It does not measure how the cost of living in Ireland compares to that of other countries. The Harmonised Index of Consumer Prices put the cost of living in Ireland at 15% above the EU average in 2012 (though high, this was an improvement on 2008 when Irish prices were the second highest in the EU and 30% above the EU average).34 Prices on average, measured by the Harmonised Index of Consumer Prices, increased by 0.3% in the year to March 2014.35 Ireland has the second highest childcare costs as a percentage of average wages across the OECD. A two-child family faces an average annual bill of €16, 500 a year for full-time childcare.36
34 CSO ‘Measuring Ireland’s Progress 2012,’ January 2014. 35 CSO CPI/HICP release, March 2014. 36 Indecon, Report on support for childcare for working families and implications for employment, produced for Donegal County Childcare Committee, December 2013.
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Measuring inflation The annual rate of inflation shows how much higher or lower prices are now compared with the same month in the previous year. For example, if the inflation rate in January 2014 is 3%, it means prices are 3% higher than they were in January 2013 and we need to spend 3% more to buy the same things. There are different ways of measuring inflation. The Consumer Price Index (CPI) is the official measure of inflation in Ireland. The Harmonised Index of Consumer Prices (HICP) is a measure of price changes, which allows comparisons of consumer price trends and the cost of living across EU states. The HICP is used by the European Central Bank as an indicator of inflation and price stability. Both the CPI and the HICP measure the change in the average level of prices of a fixed basket of consumer goods and services. The CPI measures the prices of 632 goods, service and charges. The HICP measures the prices of 624 items. The CPI basket of goods and services includes a number of important items that are not included in the HICP basket. These include mortgage interest, building materials, motor tax, house insurance and motor insurance. This means that these costs are not included in HICP-based comparisons of the cost of living in Ireland and other EU countries. See Comparison between the CPI and the HICP, Central Statistics Office information notice, March 2013.
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