Job cuts are central to recession cost-cutting strategy

New research challenges the perception that pay cuts have been widely used in the Republic of Ireland during the recession to avoid job losses. The research, based on earnings figures from the Central Statistics Office, shows that jobs were cut in nine out of 10 private sector firms where wage bills were also cut or increased during the recession. However, the Irish Business and Employers Confederation suggests that the study group did not include enough small businesses.

Background

The widespread belief that the Irish labour market has been uniquely responsive in terms of pay cuts rather than employment cuts has been contradicted by research based on earnings figures provided by the Central Statistics Office (CSO). Falls in average earnings – for instance reductions in core basic pay, cuts in the level or rates of premium payments, overtime and allowances – may have been significant, but these have rarely been introduced without cuts in job numbers.

The findings were presented to the Statistical and Social Inquiry Society of Ireland (SSISI) on 9 February 2012 in a special paper prepared by Kieran Walsh, a senior statistician at the CSO. Mr Walsh updates previous research, also published by the CSO in mid-2012. This research had analysed the composition of wage bill changes since the onset of the current crisis in the third quarter of 2008, up to the third quarter of 2009. The new study compares the changes between the first three quarters of 2009, 2010 and 2011, and then compares each year in groups of three quarters, rather than a single quarter, to eliminate any short-term factors.

The findings suggest that employers remain wedded to the traditional method of cutting costs by shedding jobs. Kieran Walsh observed:

Whether enterprises are increasing or decreasing their wage bill, it is a relative rarity for this to be done without involving employment levels as part of the change.

Although cuts in average earnings are still prominent in this lengthy recession, accounting for about 29–30% of employers in 2008/2009 and 2009/2010, the study suggests that pay reductions are made in tandem with jobs cuts, and cuts in working hours can also be a feature of these overall cost-cutting programmes.

Volume of work down

The new study shows that the ‘early response to the downturn appears very heavily to have been a reduction in the volume of work’ and that this includes employment and working hours. Where there has been a severe reduction in demand, such as happened in the dramatically shrunk construction sector, ‘retaining workers but lowering wage rates would not make sense unless there was an expectation of increase in demand, which would not have been likely for the majority of contracting businesses in Ireland in recent years’.

There were expectations that the public service pay cut of December 2009, introduced by the previous Fianna Fail-Green coalition Government and retained by the current Fine Gael-Labour coalition, would lead to widespread pay cuts in the private sector. This did not happen, and Walsh says that although there may have been instances where cuts were introduced, ‘they would not appear to have been very widespread nor to have had a substantial impact on average earnings’.

Wage bill stabilising

The 2008/2009 CSO study shows that 65% of employers reduced their wage bill, with a total 7% wage bill reduction among all enterprises. The new study shows that in 2009/2010, 57% cut their wage bill, with an overall reduction of 6% (these figures include the effects of the December 2009 public service pay cut). However, between 2010 and 2011, just 42% reduced their wage bill. The overall reduction was just 1%, because a further 42% of employers increased their wage bill.

Social partner perspectives

Paul Sweeney, Chief Economist of the Irish Congress of Trade Unions (ICTU), has said the new research proves that there has been no general internal devaluation in wages and salaries for existing employees, which ‘had been an objective of the previous government and some economists’. Had a large fall in aggregate earnings occurred on top of the job reductions, he says, the impact on domestic demand would have been even more severe.

Sweeney believes the study has ‘exposed the myth’ that Irish workers and trade unions ‘were naively compliant in undermining their own welfare during the crisis’ in support of national interests. However, by maintaining wages and salaries, unions and workers were acting as rational economic actors, he suggests, and had they agreed to widespread pay cuts, domestic demand would have collapsed even further.

Brendan McGinty, Director of industrial relations and human resources at the Irish Business and Employers Confederation (IBEC), disagrees. He has said that information available to his organisation shows that about one in four companies reduced nominal wage rates over the course of the recession, and the vast majority experienced pay freezes over 2009, 2010 and 2011. He adds:

As we head into 2012, the majority are planning to freeze pay, and about 5% still see the need to reduce nominal wage rates.

Mr McGinty also suggests that small firms may be underrepresented in the sample analysed by Walsh:

Smaller firms were twice as likely to have had pay cuts than larger ones and the aggregate data does not take account of other factors at the firm level, when, for instance, lower-paid temporary or contract staff are let go, and which may result in average earnings increasing even after basic pay rate reductions for the remaining work force.

Commentary

In the early months of the recession, when the CSO earnings figures were showing little fall in average earnings, the weekly Industrial Relations News (IRN) noted that commentators had argued the CSO figures were influenced by compositional factors. Since fewer higher-paid managers lost jobs than lower-paid workers, this increased average earnings and masked the true level of pay cutting that was taking place.

The new study investigated this question by using weighting for the three broad occupational groups that are measured by the CSO figures (managerial/professional; clerical/sales/service; and production/craft/manual). He found that the compositional effect was 1% in both 2008/2009 and 2009/2010. The IRN reported:

This means that the published CSO figure of a 2% increase in 2008/2009 would have been 1% without the compositional effect and that the 1% decrease in 2009/2010 would have been a 2% decrease. There was no compositional effect for 2010/2011.

In broad terms, the findings demonstrate that the notion of a trade-off between wage cuts and job losses – sometimes favoured in other European countries – is far less prevalent in Ireland’s more open and globalised economy.

Brian Sheehan, IRN Publishing

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