Ask the RIght Questions

The National Competitiveness Council (NCC) has released its latest Cost of Doing Business in Ireland.  It is always an interesting compilation of graphs, charts and statistics that compare Irish competitiveness against other countries.    The current release has been accompanied with a media bustle about ‘high-cost’ Ireland.  This, of course, has long been the case.  The NCC lists a number of culprits:  transport, utilities, credit and childcare.

And what would a ‘competitiveness’ review be without mentioning ‘labour costs’ (I think they mean ‘employee compensation’ which is not a cost but I’ll let that go for now).  Once again, the NCC has produced a misleading picture about labour cost trends. This has resulted in media reports referring to the ‘high cost’ of wages.  The NCC has even produced a graph to give the appearance that labour costs have been rising faster than the Eurozone average. I reproduce the graph below.

You might think, from a first glance, that since 2010 Irish workers have been getting pay rises that exceed the Eurozone average.  The general picture is that, while wages fell between 2007 and 2010, since then they have been rising at a pretty swift pace.  Thus, we have to watch out; otherwise our wage levels will become ‘uncompetitive’.  Thus, we have to be more moderate, or ‘sustainable’.

The only problem with this picture is that it is wrong and misleading.  The NCC graph is based on the data from Eurostat’s Quarterly Labour cost index which can be accessed here (it would be helpful if the NCC actually sourced the data source and not just the agency that produced the data).  In this dataset, you can choose different types of measurement.  I’m assuming the NCC is using the ‘percentage change compared to same period in previous year’ not seasonally adjusted (it works in some respects). 

The measurement that the NCC uses tells you what it tells you but, at the same time, it can distort the picture.  Here is an example.  Let’s say that wages fall by 1 percent in year-on-year quarter.  Then the next quarter it falls by 0.5 percent.  Well, you’d say that wages are still falling though at a slower rate– and you’d be correct.  However, using way the NCC measures it, it would show wages rising since the ½ percent fall is less than a 1 percent.  This is the stuff of statistical battles.

Let’s cut to the chase:  unlike the appearance of the graph above, wages are not rising faster than the Eurozone average.  In fact they are falling behind.  Let’s take the same database and construct representative pictures of the situation.  First off, let’s use an index since 2010.  This measurement is also available on the dataset.

The picture is completely different.  Eurozone and EU-28 wages are rising much faster than Irish wages which are relatively flatter.  Let’s put this into actual numbers. 

This is a far different picture than what the NCC presents and this is based on the same dataset they used.  The above shows that in both the medium term and the last year, wages are rising faster than both the EU-28 and the Eurozone. 

The bottom line is this:  the presentation of data is crucial to describing the problem which is the first step in resolving the problem.  If the NCC is contending that business costs are rising vis-à-vis other countries (thus putting at risk our competitiveness) and that part of that rise are wages – especially if they exceed productivity – then it is an issue to be discussed.

However, if wages are falling behind while at the same time business costs are rising, then the issue lies somewhere else and assigning partial blame to wage increases is misleading and counter-productive.

All this is unfortunate because the NCC has referred to a

‘ . . . relentless focus on protecting real living standards by avoiding, as best as possible, significant increases in the costs of living’. 

This is a more productive avenue of research and debate.  This encompasses issues such as rents, insurance, credit, childcare, public transport, etc.  None of these are issues because of ‘high’ labour costs – but they are issues because of a lack of public service provision (childcare, cost-rental accommodation), low public support (transport) and regulation (credit, insurance).    To address these would actually take the pressure off of wage increases which in any event are below the Eurozone average.   Going down this avenue could gift us a win-win situation:  higher living standards and lower costs.

The key point is to ask the right question in order to get the right answer.  Are labour costs high?  No.  Are labour costs growing faster than European averages?  No. 

Now, let’s discuss the real problems.

Comments

[Colum McCaffery]

A question is how long did it take Michael to root out the truth. If it was a reasonably easy job, what the hell were the journalists who reported uncritically doing?

[Michael Taft]

Colum - I had actually done a blog on this very same issue a couple of years ago, so I had done up the work previously. To be fair to be journalists, most are working under such time-constraints that there is little if any time to take a critical look at claims. This is the case not just in business/economics but in a range of other areas. This is a feature of cutting the number of journalists (and contracting out) and the 24-7 news cycle.

Of the few journalists who should know, I suspect there is a tendency to assign credibility status to bodies like the NCC. They are right until proven wrong. However, the explanation of how or why they might be wrong is not susceptible to a sound-bite culture. In addition, wading through Eurostat databases and excel sheets takes time - time which most journalists don't have for reasons expressed above.

I share your exasperation about the state of critical journalism but this seems to be spread throughout the entire sector. Ultimately, it was the NCC that produced the contentious data, not the journalists. If there is fault, it lies with the NCC. And if the agenda can be driven by such - where people assume that they 'must know what they're talking - yes, it makes for a poor debate and, so, a poor democracy.