By Marie Sherlock.
Looking from the outside in, the Irish economy is performing really well at the moment – on course to have the second-highest GDP growth across the European Union (EU) this year. Malta and Ireland have alternated positions at the top of the EU28 scoreboard for GDP growth for the past five years.
Yet ask any young worker on average earnings about their prospect of ever purchasing a home, particularly in Dublin, or a hard-pressed young couple trying to pay childcare and a mortgage or rent out of their combined average earnings and they will probably tell you they don’t feel they are doing particularly well at the moment.
This issue goes to the heart of how income is distributed in Ireland. It is measured in two ways: the first relates to how much workers can claim from the proceeds of output in terms of wages and taxes paid, relative to the owners of capital who elicit a return in the form of rents, dividends and interest paid on loans owing. This is the labour-capital share of output. The second relates to how evenly that labour and capital income is dispersed between various households.
Over the past 30 years, there has been a five-fold increase in GDP here in Ireland. Based on adjusted labour share data in the EU commission’s ameco database, we know that back in 1987 some 65.9% of national income was distributed to households. Thirty years on in 2017 that wage share has dropped to 37.1%; the lowest across the EU28.
Labour’s share of the pie is shrinking
So the overall pie has got bigger but the slice for households from employee’s income has got proportionately smaller. Importantly, within that slice, we know from ESRI work on long-run income growth and income distribution that all households are better off now compared to households across the income distribution three decades ago.
What stands out is that with the exception of the lowest 10 per cent of earners, all households saw their income more than double between 1987 and 2014. Trying to understand exactly how much higher-income households are better off becomes complicated when we factor in non-earned income. This is generated from rents, dividends and share options. For the top 10 per cent of earners, self-employment earnings and income from other sources account for some 15 per cent of overall income.
What has all of this got to do with precarious work? In short, developments within the world of work, within workplace technologies and an emerging global trend towards even larger corporates threatens to skew the balance between labour and capital further and to widen the divide within labour income.
Precarious work and automation exacerbate imbalance
Plain old-fashioned greed in the world of work remains, with many trade unions reporting the emergence of a more aggressive breed of employer. New technologies are transforming how firms produce through increased automation and the digitalisation of production and the emergence of digital platform companies are transforming how firms are organised. These technological advances plus government tax and enterprise policy are combining to ensure the growth of increasingly large firms.
We know that precarious work in Ireland is not new. My union SIPTU started off originally as the ITGWU and was formed over 100 years ago to organised casual labour on the docks in Dublin.
What is potentially new, though, is that the developments set out above will exacerbate the existing imbalance between workers and business and that this will have far-reaching implications for incomes, for future consumer demand and the sustainability of the public finances.
In its 2017 discussion paper on managing automation in a digital age, the Institute of Public Policy Reform (IPPR) in the UK note that the changes brought about by technology challenge some of our fundamental assumptions about how the world of work operates. In particular, they highlight concerns about how technology may alter “the role of employment as a primary means of distributing reward, labour’s position as a central factor of production, notions of scarcity and returns to scale and how we organise working time.” Many of these factors point to an increasing precariousness and insecurity of work.
Taking these concerns to their logical conclusion, the IPPR notes that automation and the control of many by a small number of robots may give rise to the “paradox of plenty.” In short, technological innovation may give rise to higher output but lower gain for workers and a widening inequality in the distribution of income between the owners of capital and workers. Not only would this have very serious implications for workers and their household income, their reduced purchasing power would also have a serious longer term impact on the wider macroeconomy.
US superstar giants concentrate resources further
Technology is not the only future driver of a global and national trend towards declining labour income. The rise of so called “super star” firms also plays a part in concentrating greater amounts of resources in fewer hands.
In its 2018 Economic Outlook, the OECD highlighted an increasing trend among companies in advanced countries who are oriented towards allocating an increasing share of profit towards their cash pile as opposed to sufficiently reinvesting in their business. At a time when returns from bank deposits are at historic lows and the returns on investment are very high, we would expect firm investment to be booming. Instead companies have opted to sit on large profit piles and not distribute the gains between the owners and workers.
When we look at the Irish situation, the experience of US multinational corporations (MNCs) stands out. The presence of US superstar firms has long been a feature in Ireland with global leaders in pharmaceuticals and technology located here. In his comparison of multinationals located here, John Fitzgerald highlights the extent to which US MNCs do not repatriate their cash.
US tax rules have meant for many years that US companies located abroad could “defer” repatriation of their profits and thereby put off paying US corporation tax. Ireland’s low corporate tax regime meant it was more attractive to “park” profits in Ireland. While changes were introduced to the US corporate tax code in 2017 to limit the amount of tax deferred, the new rate is hardly penal. The result for Ireland is that approximately 40 per cent of corporate tax revenues in this country comes from just 10 companies, the bulk of whom are US multinationals.
How are profits distributed via taxes and wages?
So where does that leave us? While Ireland’s public finances may enjoy the benefit of US multinationals paying significant corporate tax bills here, there is a wider and longer-term issue as to how profits are distributed via wages, how they are taxed and how they are reinvested back into companies. The macroeconomic impact of concentrating greater market power and greater resources in fewer hands means there is less to be redistributed to incomes, taxes and by extension, social spending.
Special tax deals for REITS worsen housing crisis
Or another way to think about it is to understand how real estate investment trusts (REITs) operate in Ireland and their impact on Irish tax revenues, housing supply and the precarious life of so many renters. In order to encourage investment into rental and commercial property in Ireland, the Irish state waives the corporate tax liability on the rental income generated by these trusts and it waives the capital gains tax on any property disposals provided such sales do not take place within the first three years of purchase.
The outcome? Much of the new or recently built housing supply, typically in the form apartment dwellings, has been purchased by REITs with the result that control over this type of housing supply is becoming concentrated in the hands of a few and with that, the ability to set rental prices. This is not good in terms of rental market competition and rental price, it elevates the insecurity of individual renters to a whole new level in that large swathes of renters could face a change in ownership and all that that brings, and it is not good for the public finances in that it deprives the exchequer of revenue that could be used to build additional much-needed housing.
Direct regulation of companies
So how should we respond? No one measure will ensure greater distribution of income to workers. But a series of actions can. There is a growing volume of research that has found that increased financialization of companies is a strong predictor for the decline in wage share within countries. So a strong case must be made for enhanced financial and prudential regulation of companies. As a start there needs to be greater transparency in the reporting obligations of unlimited companies.
In order to protect workers from precarious working conditions, we need to see stronger enforcement of existing labour rules so that they are worth the paper they are written on. And we need to have stronger welfare systems to mitigate the uncertain effect of flexible working conditions. We know from looking at the experience within the Nordic countries, that there is a high correlation between well designed, flexible welfare systems, lower than average wage dispersion and a higher than average wage share.
Collective bargaining rights
And finally, we need a strong legislative framework to support collective bargaining in this country. That involves the right to bargain and to be recognised for trade union negotiations. In Ireland at the moment, there is the right to benchmark wages against other workers doing similar work, provided certain criteria is met. That is not the same as the direct right to be recognised for trade union negotiations.
Again there is a growing volume of research that shows that higher union density and greater union coverage are associated with a higher wage share and lower income inequality respectively. In their review of studies on the income share, Guschanski and Onaran (2017) highlight that union density is the most robust or consistent variable exerting a positive impact on the labour share within a sector when compared with all other variables.
Union density is the proportion of workers in union membership within a workplace. And in terms of the distribution of income within that wage share, 2015 research by OECD economist Oliver Denk finds that top earners obtain a smaller share of the total wage income of an economy when a majority of all workers are covered by collective wage bargaining. He used data from Eurostat and the international trade union database ICTWSS to compare wages shares with collective bargaining coverage.
Technological advances and the increasing concentration of market power by companies in certain sectors means that the power balance between workers and employers remains greatly skewed. In that context, precarious and insecure work will remain part of the workplace landscape. Overcoming it requires stronger unions and more collective bargaining- something SIPTU is striving towards every day.
Marie Sherlock is Head of Policy & Equality in SIPTU. Follow her on Twitter @marie_sherlock.