Looking from the outside in, the Irish economy is performing really well at the moment- on course to have the highest GDP growth across the EU for the fifth consecutive year. 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 thirty years, there has been a fivefold 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.
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% 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% of earners, self employment earnings and income from other sources account for some 15% of overall income.
What has all of this got to do with precarious work?
In the first and third article in our series, we highlighted the transformative impact that automation, digitalisation of production and the rise of digital platforms are having on how firms are organized and good and services are produced. Each of the three innovations have implications for how we think about the role and power of workers, employers and the owners of capital in today’s world of work.
In their 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 note 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.
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 their latest Economic Outlook, the OECD highlights that on average companies across advanced countries are effectively spurning the opportunity to adequately reinvest in their business in favour of the accumulation of cash piles. 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. Why do this? In the Irish case, it would seem that the existence of super profits and a desire to maintain lower tax liabilities are reasons.
When we look at the Irish situation, the experience of US multinationals 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 MNC’s do not repatriate their cash. US tax rules has 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% of corporate tax revenues in this country comes from just 10 companies, the bulk of whom are US multinationals.
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 and taxes and reinvestment 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.
How do 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 financialisation 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.
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.