Job cuts reduce wage bill more than pay cuts during crisis

A special analysis by Ireland’s Central Statistics Office (CSO) of wage bill reductions at the height of the economic crisis shows that job losses were the most significant element in reducing the overall wage costs of private sector companies. Other measures applied by employers included reduced working hours and a reduction in average hourly earnings. Overall, employment declined by 8% among those enterprises involved in the survey.

About the study

In an analysis of wage bill change in enterprises (374Kb PDF), the Central Statistics Office (CSO) examined the relative importance of three components of reducing employment costs for companies between the third quarter of 2008 and the third quarter of 2009: employment levels, average working hours and average hourly earnings. It found that most labour cost savings came through reduced headcount, followed by falling hours and then falling average hourly earnings.

The CSO analysis is based on data taken from the Employment Hours and Employment Costs Survey (EHECS), a new unified data series on wage and labour costs. Only enterprises for which data were available for both periods compared – 2008 Quarter 3 and 2009 Quarter 3 – were included in the survey. This involved a sample of 3,794 enterprises, or about two thirds of the total EHECS sample for the third quarter of 2009, with those companies having a total employment of 810,300 in that quarter.

This methodology meant that companies that ceased trading during the period were not included, which could underestimate the loss of employment. But this underestimation was not severe – the sample enterprises lost 8% of employment in the period, while the CSO’s separate Quarterly National Household Survey (QNHS) for the same period showed a 9.5% reduction in employment.

Main measures to reduce the wage bill

Almost two thirds of all companies (65%) reduced their overall wage bill by more than 2% over the 12 months studied, while a quarter (25%) actually increased their wage bill by more than 2%. In this regard, it should be noted that the CSO warns that a 2% fluctuation in wages is to be expected, irrespective of the economic or business climate.

Cutting the number of employees was the means used by most employers to reduce wage costs, with 66% reducing employment by more than 2% over the year, with just 21% increasing employment by more than 2%. Average weekly paid hours were reduced by more than 2% in 51% of companies, and increased by more than 2% in 31% of enterprises.

Average hourly earnings, which can include overtime, was the smallest component of the wage bill reduction, with 35% of employers reporting decreases of 2% or more, while 47% reported increases of 2% or more. Average hourly earnings figures can be affected by a change in the composition of the workforce because greater job losses among lower-paid workers can raise average earnings. The effect is further complicated by overtime, but the survey does not isolate this effect, since additional payments are classified under two categories – regular hours and non-regular hours. Given the widespread practice of ‘regular overtime’, these payments can fall under either of these categories.

The CSO study uses figures that are adjusted to allow for different levels of job losses in different occupational groups. This shows that job losses, and to a lesser extent cuts in working hours, were the main labour cost reduction strategy used by Irish employers during the 12 months at the start of the economic crisis. The hours and earnings figures were standardised to remove – in so far as possible – the compositional effect that takes place when, for example, higher job losses among lower-paid workers lead to an increase in the proportion of higher-paid workers, and hence an increase in average earnings.

Wage bill changes by sector

Within the private sector, the largest fall in the wage bill (28%) was, not surprisingly, in construction. Many other sectors saw double-digit falls, with professional, scientific and technical down 19% and most other sectors between 10% and 15%.

Industry – a key exporting sector – saw a 9% fall in the wage bill, while the wholesale and retail trade and financial services each saw just a 7% fall.

In the public sector, education as well as human health and social work saw an increase of 6% and 4% respectively, largely offset by a 6% fall in ‘other public sector’ enterprises, which would include many commercial semi-state companies. (Note: The survey does cover the wage cuts introduced in the Irish public sector as a result of the Budget for 2010.)

In relation to employment levels, there was an 8% decline across all employers. Again, construction was the worst hit, where employment fell by 26%, while employment fell by 4%–7% in the wholesale and retail trade, transportation and storage, information and communication, financial services, and human health and social work. Employment fell by 10%–15% in industry, accommodation and food services, the professional, scientific and technical sector, administrative and support services, as well as arts and leisure.

The largest falls in working hours were 4% in industry, accommodation and food services, and administrative and support services. Several sectors saw no fall in hours – wholesale and retail, information and communication, financial services, and human health and social work.

Commentary

Much media attention in Ireland has focused on the appearance of pay cuts in the private sector as a feature of the Irish employment landscape. However, reductions in cuts in average earnings do not necessarily mean cuts in basic pay. For example, overtime hours and shift rates can be cut, leading to hourly pay declines, even if basic pay is merely frozen. The salient issue emerging from the survey is that when employers seek to cut costs during the recession, they are more likely to cut employee numbers or hours of work, before they focus on regular earnings.

The survey also confirms the comment made by Tony O’Brien, a former president of the Irish Business and Employers’ Confederation (IBEC), who said that the extent of wage cuts in the private sector ‘weren’t anything like the folklore would suggest, while in the public service they were very significant’. In a statement to the Irish Times in August 2010, Mr O’Brien, who is also Chair of the committee that reviews the pay of higher public servants, stated that the committee’s examination of pay generally indicated that wage cuts in the private sector had been overstated in the media.

Brian Sheehan, IRN Publishing

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