The Real Game Plan

Let’s take a step back from the details in order to see what is happening in the wider economy – which has now fallen back into a double-dip recession according to the CSO report today.  The real game plan is to suppress wages in order to boost profits.

This strategy was first announced Budget 2009 under the Fianna Fail-led government which claimed there was no alternative to wage reduction.  The current Government has maintained that strategy.  We have seen a restructuring of Joint Labour Committees which has removed much of the protection accorded to low-paid workers in sectors such as retail, restaurants and hotels. And we know what the Government wants in the current Croke Park 2 proposals.

Further, the Minister for Finance has called for cuts of 6 to 10 percent in the banking sector, even though the Mercer Report showed that over 40 percent of all staff in the three covered banks (Bank of Ireland, AIB and PTSB) has an average wage of €30,000.

Profits, meanwhile, have been on the increase.  In 2010 and 2011 combined profits rose by 11 percent.  If we take a longer view – and compare wage and profit growth projections with the Eurozone average – this is what we find, courtesy of the EU Commission’s AMECO database.

Profits Wages

There are two things of note in this:

First, Irish profit growth greatly exceeds that of average Irish wage growth.  Irish wages per employee in 2014 is projected to be below what they were in 2008; Irish profits on the other hand will have grown by 30 percent.  In the Eurozone wages and profits is projected to grow in tandem.

Second, Irish profits are growing at a faster rate than the Eurozone average while Irish wages are lagging far behind.

The Government is setting a trend for the rest of the economy.  By pursuing its own wage cutting strategy – whether through the public sector or the JLCs or banking staff – they are signalling to the private sector that they should similarly cut, or at least keep wage increases below inflation (which means a ‘real’ cut for workers).  After all, there is no alternative to wage reduction.

This strategy is premised on the idea that low wages and high profits somehow makes an economy ‘competitive’.  In truth, it drives down consumer demand which in turn makes it difficult to start-up and expand private enterprises.

Irish wages are being suppressed to allow for higher than average profit growth – much of which will not benefit the economy as it will be repatriated.  Croke Park 2 is a critical part of that strategy.  And if it succeeds in giving the green light to private firms, it will be all of us who will suffer, not just public sector workers.

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Damaging Impact of Croke Park 2

This post is written by Michael Burke, former senior international economist with Citibank and currently an economic consultant.

The implementation of Croke Park 2 will have a very damaging impact on the economy and jobs, and as a result will struggle to have any beneficial impact on government finances at all.

That is the verdict based on the experience of austerity measures since 2008. Over that time and until the end of 2011 there were €14.6 billion in spending cuts and tax increases. On the same cash basis GDP fell by €23.6 billion.

This means that for every €1 in austerity measures the economy contracted by €1.6 as workers and businesses, pensioners and others responded to government cuts by making cuts in their own spending and investment. If the response to Croke Park 2 follows that pattern, the economy will contract by about €1.6 billion.

This will lower living standards and hurt jobs way beyond the public sector. Every public sector worker is a consumer of private sector goods and services. Private sector businesses will cut back on investment even further if demand for their products is declining.

As a result, government tax revenues will be hit. To the extent that a further fall in the economy hurts employment, government spending on unemployment benefits and other social welfare will rise.

The saving of €1 billion from cutting public sector pay will be an illusion. Because of that cut in pay tax revenues will be depressed, not just directly on the incomes of those workers but also from the indirect effects on the economy. Government outlays will also be forced higher on social welfare spending.  The Department of Finance now estimates that this sensitivity of government finances to changes in the economy is 0.5.  So, following a €1 billion cut in public sector pay there will be a fall in the economy of €1.6 billion which in turn will depress government finances by €800 million. Even on government estimates, the saving will be just €200 million.

Michael Burke

It may not even be as high as that. According to the EU Commission, the government’s deficit has so far only fallen by about 1% of GDP despite all the austerity measures to date. In effect, €14.6 billion in austerity measures has yielded just one-tenth of that in improvement in government finances.

The economic damage of austerity measures has been enormous. The claim that this is a necessary evil in order to reduce the deficit is false. The deficit has barely moved despite the cuts. Croke Park 2 is unlikely to be any different.

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Unions Welcome Tanaiste’s Clarification

The following is a statement released by the group of unions opposed to the pay cuts deal:  the CPSU, INMO, IMO and UNITE.

The group of unions opposed to Croke Park II have welcomed a clarification by Tanaiste Eamon Gilmore in relation to the current Croke Park agreement and called on the Department of Public Expenditure and Reform to withdraw a statement it made last Friday and issue a correction.

Mr Gilmore said the current Croke Park agreement expires next year and when it expires, if there is no replacement, the guarantees which were contained in it will not apply beyond the expiry date of the agreement.

Last Friday the Department of Public Expenditure and Reform (DPER) issued a statement which said that unless the proposals for Croke Park II were ratified the current agreement would then cease immediately along with the protections it gives.

The group of unions opposed to Croke Park II has now called on the Department to withdraw its erroneous statement and issue a correction.  A spokesperson for the unions said:

 ‘Last Friday’s statement by DPER – which was widely reported in the media – was misleading, inaccurate and a gross interference in the democratic decision-making process of the public service trade union movement. It has caused a great deal of unnecessary confusion and even created a climate of fear amongst union members. We are calling on the Department to withdraw it and state the correct position immediately.’

Unions Opposed to Croke Park II – which comprises the INMO, the IMO, the CPSU and Unite – have accused DPER of engaging in ‘scaremongering’ and attempting to unilaterally rewrite the basis on which the talks took place in the first instance.

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What is the Government Hiding?

The Minister for Public Expenditure and Reform has replied to a letter from UNITE’s Regional Secretary, Jimmy Kelly.  Jimmy asked the Minister for the Government’s estimate of the economic and budgetary impact of the proposed cuts:

‘I would like to request the Government’s estimate of the economic and fiscal impact of the proposed €1 billion in spending cuts that are being sought.   In particular, we’d like to request the impact on:

  • GDP growth
  • GNP growth
  • Employment in the economy
  • Unemployment
  • Private consumption (i.e. consumer spending)

When these are factored in, we would then like the Government’s estimate of the reduction in borrowings or the General Government Deficit.’

In Minister Howlin’s reply (Reply from Minister Howlin) he only supplied information on GDP growth.

‘Model simulation conducted using the ESRI’s HERMES model suggests that a €1 billion reduction in the public service wage bill would reduce the level of economic activity by somewhere in the region of ¼ to ½ a percentage point in the short-run.’

The Minister did not give information on GNP growth (domestic economy), employment, unemployment and consumer spending. Most importantly, he didn’t provide information on the impact on the deficit.  There are two things to note about the Minister’s reply.

First, given that his Department is running simulations with the ESRI model, they would have the information regarding employment, consumer spending, etc.  Further, they would have estimates of the impact on the deficit.

This begs the question – why withhold the information?  What is the Minister hiding?  Not only in this response to UNITE, but in a lengthy article in yesterday’s Sunday Business Post, the Minister has refused to detail that actual savings the Government will achieve in this deal.  This has been the mantra of Ministers throughout the process – they need savings but won’t say what the savings under this pay-cut deal will achieve.

Second, the one piece of information the Minister provided – the impact on GDP growth – shows that the economic impact of cutting public sector pay is more negative than previous estimates.  In fact, the Government is estimating that pay cuts could be two-and-a-half times more damaging than previous ESRI estimates.  If so, the pay cuts will end up saving the Government very little.

And even this admission may be an under-estimate.  The Minister’s new figures are based on a model.  However, there is strong evidence that models have under-estimated the actual damage austerity has inflicted on the economy and people (remember the IMF’s apology about under-estimating the impact of austerity?).

These are not just mere numbers on a page.  The more deflationary a measure, the more negative impact on the economy, the more tax revenue falls and the higher unemployment costs rise. Yet, the Government, while admitting that public sector pay cuts are highly deflationary:

  • Refuse to reveal their estimates of impact on jobs and domestic businesses
  • Refuse to reveal how much savings will the Government will actually achieve

This is despite the fact that the Government has the information.

Why is the Government running away from this issue?

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Posters for the Campaign Against Croke Park 2

The group of unions campaigning against the new pay-cuts deal – the CPSU, the INMO, the IMO and UNITE – have issued a series of posters highlighting the faults of the deal.

Reasons to Vote NO.

Reasons to Vote No

Anti-Family and Anti-Women.

Anti-Family and Anti-Women

Extra Hours.

Extra Hours

Increments.

Increments

Redeployment

Redeployment

Consequences of a No Vote.

The Consequences of a No Vote

Send these to work colleagues and fellow trade unionists, put them up in your workplace – use them to spread the message and step up the campaign against these unnecessary and regressive pay cuts.

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How Public Sector Cuts Will Affect Cork

Tonight in Cork is the first of a series of meetings throughout the country sponsored by the four unions which walked out of the negotiations – CPSU, INMO, IMO and UNITE.  Therefore, it is timely to examine the impact of the proposed pay-cuts on the local economy in Cork.

While we talk about the ‘economy’ we should realise there are hundreds of local economies throughout the country.  People in Cork are likely to shop in Cork, not Cavan.  The unemployed in the North-West will, in the first instance, try to get a job in their own locality.  An area with a high elderly demographic reliant upon social protection pensions and relatively few people of working age is likely to be low-income, especially in rural areas where services are being cut.

So, if possible, it is useful to examine the data available for local and regional areas.  On this basis we can make some estimates, though many of these are extrapolations and deductions.  For instance, we know that the Cork-Kerry region has a higher GDP than the national average (as measured by gross value added).  As a result, it has a slightly lower unemployment rate than the rest of the state.

We can also estimate that 18 percent of all those in work in Cork are employed in the public sector.  That is a sizeable proportion – more than one-in-six.  With the proposed pay cuts averaging out at 5 percent per employee, that is a considerable hit to the local consumer economy.

Working from what we know, and extrapolating from the national impact, we can estimate the following:

  • Public sector workers will suffer an average cut of €2,300
  • In Cork, there is a potential loss of up to €100 million in consumer spending. This will put even more pressure on local businesses as their turnover falls.
  • There is a potential employment loss of up to 500 and more throughout Cork
  • There is a potential employment loss in the private sector of up to 275

This is a substantial hit for the local economy.  These impacts will be repeated in the hundreds of local economies throughout the country.

This shows that the proposed pay-cuts are both a national issue and a local issue, just as it is both a private sector issue and a public sector issue.

So come tonight to the meeting in Cork:  Cork City Hall, 8:00 pm.

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Hitting the Lower Paid Even Harder

The Government claims their proposed pay-cut deal is ‘fair and equitable’.  They must have a strange idea of fairness and equity because when you drill down into the Euros and cents you find that the lower paid will be hit harder.

Let’s take the example of single person who works 10 Sundays a year.  Currently they receive double-time.   The proposed pay cut would reduce this to 1.75.  The impact on gross incomes is the same across the income categories.

Sunday Premium After Tax 1

However, once you factor in the impact on disposable income (that is, after tax) the situation changes dramatically.

Sunday Premium After Tax 2

Those on lower pay will find they suffer a much higher impact on their take-home pay – a hit that many lower paid cannot afford or absorb.  The reason for this is the interaction between the standard rate of tax and the top rate of tax.  The Government, of course, is aware of this impact.

This trend will persist with couples – whether it is one or both spouses working.  Those on the standard rate of tax will suffer a higher impact on their net income than those on the higher tax rate.

The fact is that a number of cuts will have a disproportionate impact on those with lower incomes.  UNITE estimates that the deal represents an average pay cut of 4.8 percent.  This will be higher for those working shifts.  And – it will be higher still for those on lower pay.

Not only has the Government victimised workers for the failure of their own policies – they have constructed a set of pay cuts that victimise the lower paid even more.

So much for ‘fair and equitable’.

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UNITE Responds to Flawed Analysis of Public Sector Pay

A recent article in the Irish Times shows how data can be manipulated to serve the most flawed arguments.  For the attack contained in the article is directed not just at public sector workers – ultimately it is directed at the living standards of all workers.  Public sector workers are just the latest pretext.

The article claims:

‘The degree to which public sector workers benefited from the unsustainable inflow of tax revenues during the property bubble years should not be in question.’

What it doesn’t say is that the public sector didn’t benefit any more than the private sector.  The CSO shows the following:

Irish Times 1

Two things to note here:  first, the difference in pay increases over this nine-year period, which covers most of the boom period, is small.  This even covers the benchmarking in the public sector (which many commentators insist gave public sector workers an additional increase over private sector workers).  Given all that, the differences between the sectors are not significant.

Second, it should be noted that public sector workers benefit from an employer that recognises trade union membership and collective bargaining.  In the private sector workers don’t have this benefit.  Why is this important?  As UCD’s Professor Frank Walsh recently reported to an economic conference:

‘The pay premium enjoyed by trade union members is between 8 per cent and 10 per cent.’

Irish law doesn’t recognise worker’s bargaining rights – unlike almost every other industrialised country.  If private sector workers had this right, their incomes would, on average, be expected to be higher.  But the Government, in collusion with employers, have worked to depress incomes in the private sector by denying labour rights in the workplace.  It will be interesting to see if commentators who complain that private sector wages are too low vis-à-vis public sector wages, will support the right to collective bargaining.

Tends Since the Crash

What has happened in average weekly income trends since the crash?

Irish Times 2

Average incomes in the private and public sectors, according to the CSO, have fallen by 3.2 and 3.6 percent respectively.  However, the CSO doesn’t factor in the pension levy that was imposed in early 2009.  This is because the pension levy doesn’t reduce the gross pay, though it hits take-home pay.  Had the Government just cut this off the top –as would be done in most pay cuts – public sector average income would show a fall of approximately 9 percent (or 7 percent when tax relief is factored in).  This could change slightly depending on the changed composition of the public sector workforce with different rates of pension levies.

So, we have two trends.  One, before the crisis, which shows that public and private sector pay increased at approximately the same rates during the boom period. Since the crisis, public sector pay has fallen be a greater amount in the private sector when the pension levy is factored in.  But what about the private-public pay differential?

Public Private Pay Differential

The graph in the Irish Times article produces is wholly misleading.  Not only does it not factor in the pension levy, it shows the weekly income between categories of workers that are not comparable.  There are no public sector equivalents of hotel, retail and restaurant workers; there are no private sector equivalents of Guards, soldiers or fire-fighters.  What is needed is a like-for-like comparison.

The CSO has produced such a comparison – using factors such as occupation, length-of-work, age, trade union and professional membership, size of employment; all factors that influence pay scales.  This is what they found.

Irish Times 3

According to the CSO, permanent full-time public sector employees earn between 7.3 and 8.5 percent more than their private sector counter-parts on a like-for-like basis.  Interesting, however, is that this falls for males to between 3.5 and 5.4 percent.  A large part of the pay gap is the earnings of women; in the public sector gender pay gap is far less than in the private sector.  If anything, the problem lies among private sector employers who perpetuate an unacceptable large gender pay gap.

This analysis take us a long, long ways from commentary that is hostile to public sector workers’ living standards.  There is considerable dispute about the methodologies measuring the public-private pay differential.  The ESRI takes exception to the CSO’s method – you can read this here (unlike other commentators who refuse to inform the debate, UNITE has no problem in providing the contrasting perspectives; we believe, however, that the CSO method is superior but you can make up your own mind).

But in all this there is a big, big caveat – the above differentials do not include the pension levy.  If it did, the pay gap would almost disappear with males in the public sector actually earning less than their private sector counterparts.

A More Equal Pay Structure

What may motivate many commentators’ hostility to public sector workers’ wages is that the pay structure is more equal than the pay structure in the private sector where ultra-high and ultra-low pay rates prevail.  The following graph is taken directly from the CSO publication.

Irish Times 4

This shows that low-average income earners in the public sector earn more than their private sector counter-part; in particular, women.  However, this gap narrows the higher one goes up the income scale until it hits €60,900 where the public sector worker actually starts falling behind their private sector counterpart.   UNITE is very clear on this issue.  If the pay structure in the wider economy reflected that in the public sector:

  • The recession would not have lasted as long because there would be higher demand from better paid low and average income earners (low-pay reduces demand and, therefore, drives recessions).
  • There would be less in-work poverty and deprivation (there are over one million people officially categorised as suffering deprivation – 50 percent of these are households where there is at least one person in work).
  • There would greater income equality which has been shown to have a number of beneficial social effects; in particular, health.

When commentators attack public sector pay they are actually attacking a more equal distribution of income and living standards in society.

Sharing the Pain Or Shedding Out Even More?

Some commentators claim that since private sector workers have lost their jobs, public sector workers should share the pain through wage cuts.  What this commentary misses (either deliberately or through ignorance) is that this ‘pain’ is causing even more job losses in the private sector.

The ESRI estimates that between 3,500 and 4,000 private sector jobs for every €1 billion cut in public sector wages.  In addition, for every 1,000 jobs lost in the public sector, 130 jobs are lost in the private sector.  On this basis, between 13,000 and 14,000 jobs have been lost in the private sector due to cuts in the public sector payroll.  So much for protecting private sector jobs.  This is not about ‘sharing the pain’ between the public and private sectors; this is about inflicting pain on all workers for a crisis they didn’t create; inflicting pain on all workers regarding of which they sector they work in – the private, public or voluntary sectors.

So, when commentators come bearing graphs and data claiming that this wage or that wage is unaffordable or ‘uncompetitive’, it’s almost always a pretext – to cut workers’ living standards.  And it doesn’t matter what sector these wages are earned in – UNITE’s Jimmy Kelly recently responded to the attacks on private sector wages by the Central Bank.  Today, its public sector wages.  Tomorrow it will be private sector wages – again. Then it will be low-paid.  And the next day it will be someone else.  The wheel of austerity and wage cuts continues spinning.

It’s all part of a piece.  And the facts are always secondary.

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How Many Will Say ‘Enough is Enough’?

The following is written by Peter Connell, formerly of Trinity College, Dublin and SIPTU member:

The Executive Summary of the Croke Park 2 document states that while a

‘significant level of reform…has already taken place…further measures are required to underpin the delivery of a more integrated, efficient and effective public service’.

Any fair reading of the document, however, will reveal that its purpose is to cut, not reform. Cut pay, cut flexible working, cut overtime payments, cut staff numbers, cut payment for unsociable working hours. Some things it will increase rather than cut – increased working hours and increased staff flexibility being the most obvious.

An unintended cut arising from this agreement and the way in which it was negotiated will be to staff morale. For public sector workers on the ground the gap between the rhetoric of government ministers lauding the public service and touting reform, on the one hand, and the spirit of the bookkeeper that informs Croke Park 2, on the other, is hard to take.

For a start the trade union negotiators representing over 250,000 workers were treated with a level of contempt. A reasonable request by the unions to be given details of how the management side’s agenda would deliver £1 billion in net savings was simply ignored. If pay cuts are to be accepted and extra hours worked for free it seems we have to believe what we are told and just swallow the medicine. Real negotiations involve assessing the merits of what’s being proposed, of being able to table counter-proposals. Not just tinkering at the edges of the management agenda which, bizarrely, is reproduced as part of the introduction to the document. The trade union agenda, however, does not seem to merit inclusion.

Staff morale is also undermined by the exclusive focus on measuring and costing. Of course all organisations employing staff need to set down hours of working, arrangements for overtime etc. But many staff working in health and education, for example, may reflect on just how many hours a week they already contribute to their employer for free. Costing and measuring is, after all, a two-way street. What does the Croke Park document have to say:

  • To the nurse who turns up for her night shift twenty minutes early and leaves half an hour after her shift officially ends so that she can conduct a proper handover to day staff?
  • Or to the teacher organising the school debating team, the athletics or football team, the school choir, helping students with their Young Scientists projects or all the other activities that are an essential part of what constitutes an education?
  • Or to the IT worker in a government department or university who works through the evening (no overtime paid) to ensure that data is recovered in time for the following day?

What the Croke Park document says is – we’re assuming you’ll continuing doing all these things (because the whole set-up would collapse without your good will) but you’re now going to work an additional 2-3 hours a week for free because the national finances demand it.

Over the next few weeks tens of thousands of public servants will be considering their options. And one option will be to say – enough is enough.

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Croke Park 2 Will Mean an Average Real Pay Cut of 10%

The pay-cut deal that public sector workers will soon be voting on is different from pay cuts in the past.  Previously, pay cuts were based on a percentage of the basic pay.  So, if you were earning €40,000 and the Government cut your pay by 5 percent, then you just take that 5 percent off the top.  Your wage is cut by €2,000.  Easy to calculate.

The current buffet of cuts, however, involve layers of reductions that interact with each other – all putting downward pressures on wages:  Sunday premium, extra hours working, twilight pay, increments freeze, etc.  Different sets of workers will suffer different impacts.

However, we can establish an average pay cut.  The Government is proposing a reduction of €938 million.  However, not all of this will come out of workers’ pockets.  Reducing public sector employment doesn’t impact on current wages (though it impacts on working conditions and quality of public services).  As well, increasing working hours represents a cut in the hourly wage; however, the annual wage remains the same.

So when we exclude these two items we find that the proposed pay-cut deal has an impact of €688 million on workers’ wages.   This reduction represents approximately 4.8 percent of the Exchequer payroll.

  • So, on average, public sector workers will experience a 4.8 percent cut in their pay.

As we said above, this is just an average.  For some workers it will be less; for others it will be more – especially for those working varying shifts.  But, on average, it will represent a 4.7 percent cut in workers’ pay.

But in real terms it will be more, much more.

When we say real terms, we refer to inflation.  If you earn €40,000 this year and this is frozen for next year, but inflation is 2 percent, your wage next year is worth 2 percent less (or €39,200).  This is not an abstract calculation.  The price of goods and services will rise but your pay is the same.  So you will have the same amount of money but you will find yourself purchasing fewer goods and services.  If inflation is 2 percent, you would need a pay increase of that same amount just to stand still.

Inflation is rising.  The Government projects that inflation will rise by 1.7 percent this year, 1.8 percent next year and 2 percent in 2015.  That’s a rise of 5.5 percent over the lifetime of this proposed pay-cut deal.

So what does that mean for public sector workers?

  • On average, public sector workers will suffer a real pay cut of 9.7 percent up to 2015.

For some workers it will be less but for many the real pay cut will be even more.

And this is doesn’t count further tax increases – or for households with children, further cuts in Child Benefit or other income supports.  When you factor in property taxes and water charges, after-tax income will fall even further.  And if personal tax credits are not inflation indexed (not likely), this will mean even more real cuts in disposable incomes.

The only mitigating factor in all this is increment payments.  But there are a number of people who do not receive these; for others they will be frozen until after 2015; and the total amount of increments is falling rapidly – they now make up a fraction of the total pay bill.

So when workers come to vote on the pay-cut deal – look behind the numbers on the page.  For, on average, you will be asked to cut your real pay by 10 percent over the next three years.

And that’s a big, big cut.

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