Earnings and Labour Costs During the Recession

Average Earnings of Private Sector Workers Virtually Unchanged by Recession The average earnings of private sector workers remained virtually unchanged through the worst of the recession, according to new ESRI research. Despite the unprecedented fall in output and the sharp rise in unemployment, both average earnings and average labour costs hardly changed between late 2006 and late 2009. The findings are based on data for individuals and enterprises from the National Employment Surveys. While some may find them surprising, the findings for Ireland are consistent with international evidence. Firms that need to adjust costs try to avoid cutting wages, preferring instead to reduce staff numbers, hours worked and bonuses. The international evidence suggests that enterprises may be reluctant to cut wages because they fear productivity losses arising from lower morale, increased monitoring costs and/or higher rates of turnover, as employees resent a change in their pay relative to comparable employees elsewhere. The new research shows how several other factors that contributed to maintaining private sector wage rates in Ireland are consistent with continued productivity growth. For example, while there was downward pressure on wages coming from an increase in the share of part-time workers, there was also upward pressure coming from the rising proportion of graduates in the workforce. The Irish evidence also suggests that, with the onset of the recession, firms ceased to reward long service in its own right, which had the effect of reducing the pay gap between older and younger workers. Average wages were largely unaffected by changes in the composition of the workforce over the period. The authors discuss potential policy responses to the situation where private sector wages are maintained but unemployment is very high, including the possibility of negotiated wage adjustments to boost employment, drawing a parallel with what was achieved with the original social partnership model. However, they highlight a number of difficulties associated with such intervention in the labour market.

Note to Editors: 1. Explaining Changes in Earnings and Labour Costs During the Recession, by Adele Bergin, Elish Kelly, Seamus McGuinness (ESRI), is the 9th paper in a special series of ESRI studies that survey available evidence to address issues related to Ireland's ongoing economic crisis. It will be published online on the ESRI website at 00:01 a.m. Wednesday 18th April. A copy of this paper is available under embargo on request. 2. A total of 12 studies are being undertaken as part of this “Renewal” project, which is supported by FBD Trust . 3. This paper will be presented at the ESRI Conference on Economic Renewal: 'Economic Adjustment' , to be held at the ESRI on Wednesday 18th April 2012.