Company strategies to avoid pay cuts during the recession
Published: 16 July 2012
A discussion paper, Explaining changes in earnings and labour costs during the recession (1.11Mb PDF) [1] published by the Economic and Social Research Institute (ESRI [2]) in April 2012, analysed trends in earnings and labour costs in Ireland between 2006 and 2009.[1] http://www.esri.ie/UserFiles/publications/EC009.pdf[2] http://www.esri.ie
A new study conducted by The Economic and Social Research Institute (ESRI) used data from the Central Statistics Office to look at trends in earnings and labour costs between 2006 and 2009. It found that Irish companies were generally reluctant to cut pay as a way of reducing costs during the recession, preferring instead to cut employment conditions. Over 60% of companies adopted strategies such as reducing staff, hours worked, bonus payments and overtime in 2009.
Introduction
A discussion paper, Explaining changes in earnings and labour costs during the recession (1.11Mb PDF) published by the Economic and Social Research Institute (ESRI) in April 2012, analysed trends in earnings and labour costs in Ireland between 2006 and 2009.
The analysis used data from the National Employment Surveys (NES) for 2006–2009 carried out by the Central Statistics Office (CSO) and company-level wage data from the CSO’s Earnings, Hours and Employment Costs Surveys (EHECS) for 2008–2011.
Key findings
The analysis of the two datasets found that:
... despite an unprecedented fall in output and rise in unemployment, both average earnings and average labour costs increased marginally over the period.
(Bergin et al, 2012, p. 1)
The paper’s authors concluded that there is:
... a general reluctance of firms to cut wages in order to avoid productivity losses associated with worker dissatisfaction or higher rates of labour turnover. In support of this view, the study demonstrates that firms will adopt strategies such as reducing staff numbers, hours worked and bonus payments, in preference to reducing wages.
(Bergin et al, 2012, p. 1)
Over 60% of companies cut employment conditions
The authors found that 61.8% of companies had introduced some type of cut in employment conditions in 2009 (see table). However, they state that:
... when we examine the individual strategies we can see that the incidence of cuts for each is quite low, especially given that the economy was in the depth of the recession at that time.
(Bergin et al, 2012, p. 28)
In particular, in relation to pay cuts:
Anecdotal evidence at that time suggested that there were widespread cuts in private sector pay; however, the evidence…indicates that pay was left unchanged in three-quarters of firms [in 2009].
(Bergin et al, 2012, p. 28)
| Percentage of companies | |
|---|---|
| Overall | 61.8 |
| Type of cut: | |
| Staff numbers | 34.0 |
| Hours worked | 29.0 |
| Bonuses | 26.1 |
| Pay | 23.2 |
| Overtime | 21.6 |
| Allowances/premiums | 15.7 |
| Paid leave | 2.3 |
Source: Bergin et al. (2012, Table 16)
Private sector pay has not altered
The study found that ‘private sector wage rates have altered little since the onset of the recession’ (Bergin et al, 2012, p. 32). However, its authors believe that the aggregate data hide ‘a very complex picture’. In the male labour market, an increase in part-time workers led to a decrease in wages. But this was offset by a rising share in the proportion of graduates. The female labour market also saw a compositional change with an increase in part-time employment depressing wages, ‘but this was more than offset by an increase in the share of graduates and a substantial jump in the return to females employed in larger firms’.
Looking at company-level strategies, it was found that:
... labour costs were held down by a rise in the share of part-time workers and a fall in the costs associated with higher tenure, but these effects were more than offset by the influences of a rising share of graduates and a rise in the average cost of labour within larger firms.
(Bergin et al, 2012, p. 32)
The authors concluded that:
… while some downsizing has been necessary within most sectors in response to market conditions, those firms that have survived have done so by retaining their most productive workers.
(Bergin et al, 2012, p. 32)
They also found that:
... downward wage rigidity in Ireland has been a consequence of a rise in the relative share and returns to graduate employment and a rising payoff to working in a large firm, particularly for females.
(Bergin et al, 2012, pp. 32–33)
According to the paper’s authors, their analysis suggests that:
... firms have behaved in a profit-maximising way and rewarded productivity among their workforce.
(Bergin et al, 2012, p. 33)
Commentary
The authors of this paper point out that:
The demise of social partnership over the period of study suggests that employers were not heavily constrained by bargaining arrangements and that labour market conditions were generally more flexible than they had been for quite some time.
(Bergin et al, 2012, p. 33)
There was no evidence of ‘institutional barriers to downward wage adjustment’ and the authors found ‘no substantial impact on the trade union variable’ in their analysis of labour costs (Bergin et al, 2012, p. 33).
Furthermore, given that wage costs were predominately driven by returns to rising graduate employment, our analysis also shows that wage rigidity was not a consequence of a high wage floor among low-skilled workers.
(Bergin et al, 2012, p. 33)
In this context, the authors concluded that:
... there may be little to be gained from pursuing policies aimed at labour market deregulation such as, reducing the minimum wage and/or restricting bargaining arrangements within firms/industries, as such policies are unlikely to influence the wage setting behaviour of firms.
(Bergin et al, 2012, p. 33)
References
Bergin, A., Kelly, E. and McGuinness, S. (2012), Explaining changes in earnings and labour costs during the recession (1.11Mb PDF), Renewal Series Paper 9, The Economic and Social Research Institute, Dublin.
CSO (Central Statistics Office) (2011), National Employment Survey: 2008 and 2009 (790Kb PDF), The Stationery Office, Dublin.
Roisin Farrelly, IRN Publishing
Eurofound recommends citing this publication in the following way.
Eurofound (2012), Company strategies to avoid pay cuts during the recession, article.
