Wage inequality in Ireland is one of the highest in the EU. And it is rising.
Eurostat’s Structure of Earnings Survey measures the ratio of hourly earnings between the 9th decile (high-income) to the 1st decile (the lowest). Ireland has the highest wage inequality among its peer group – other high-income economies. Within the EU, Ireland ranks the fourth most unequal, after Cyprus, Bulgaria and Latvia.
This is not a result of the Covid / cost-of-living interventions. High wage inequality is a chronic feature of the Irish economy.
Fo the last 20 years Irish wage inequality has been 4.0 or higher – always near the top of the inequality table. We see wage inequality rising in 2022 to the highest since 2002.
Why does this occur? One explanation is that because of the presence of the presence of multi-nationals in high value-added sectors such as pharmaceuticals and big Tech, we have a large share of high-waged occupations. This explains some of this. Ireland has the highest earnings in the 9th decile. But it is at the low end in the 1st decile. So we have high pay and low pay at the same time.
Another explanation, however, is the lack of collective bargaining rights for employees. Collective bargaining has the effect of raising wage floors and shrinking the wage gap between the highest and lowest paid in a firm and across sectors. Without collective bargaining, higher income groups (senior management, professionals) can secure higher earnings at the cost of lower and average paid.
Why should this matter and become a central issue on the Government’s agenda? Because it is economically inefficient and harmful to enterprise productivity. At the macro-economic level, low pay undermines wage-led private consumption (consumer spending). Simply, put if low-average income groups have less income, they spend less. However, money flowing upwards the income scale ends up in savings, benefitting the saver but not necessarily the economy; especially if the savings contributes to asset inflation (e.g. housing). The goal of efficient macro-economic management should be greater wage equality.
Second, large wage gaps can negatively impact productivity. Policardo, et al. find that wage inequality leads to lower productivity while Hutter finds that structural inequality shocks have a negative impact on hours, productivity and wages. In a survey of 31 European countries Bağlıtaş estimates that a 1 percent increase in wage inequality reduces labour productivity by 0.16 percent.
The Government is committed to publishing an Action Plan for Competitiveness and Productivity within 12 months. In that Action Plan, reducing wage inequality through greater workplace democracy (i.e. collective bargaining) should play a central role.
Greater wage and social equality are key to growing the productive economy.
It remains to be seen if it will be key to the Government’s Action Plan.
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