Public Sector pay in Ireland & the €50,000 question: It’s not that difficult!

Watching Monday’s Questions & Answers, I became increasingly baffled as to how poorly understood the gap between public sector and private sector pay in Ireland actually is. I conducted a mini-straw poll, through the various media of living room chat, email and Twitter. That poll made me realise that while I had been labouring under the presumption that despite all the stats we have on wages across sectors, those stats were having no impact, others were labouring under the presumption that the debate had to be kept at a general level because we had no statistics on the topic.

The guts of a decade ago, I undertook some research for Prof. Frances Ruane on the original benchmarking deal. What we found at the time was that there was no gap emerging between public and private sector wages, or if the gap was there at all, it was in favour of public servants. For those interested in more on that 2001 perspective, I’ve embedded a version from Scribd at the very bottom of the post.

Given the way this week is going, with public sector unions somewhere between agog and apoplectic at the idea of having their wages reduced, and given that no-one in public discourse (if Q&A is representative) is quoting these figures, I thought it might be no harm to see if I could do up what we in the business call “a one-slider” that might make them understand the decision a little better.

First, a general comment about public sector pay cuts. This can’t possibly be that much of a surprise to anyone in the public sector. After all, this is what they signed up to in 2001, with benchmarking. Benchmarking may have been an incredibly expensive way to do it – costing the economy €1bn+ every year and counting – but it did establish a principle in public sector wages in Ireland. That principle is that trends in public sector wages must mirror those in the private sector. It’s incredibly cheeky of those happy to have the principle applied in the good times to argue that they shouldn’t have to ‘bear the brunt’ of having the same principle applied in the bad times.

Now for the one-slider!

Graph of public and private sector wages, Ireland, 1998-2008

Graph of public and private sector wages, Ireland, 1998-2008

And in true consultant style, three key points from the above graph:

  • Lest we forget the most obvious, in every year of the series, public sector workers were paid more per year than their private sector counterparts*. 30% more on average! (There may be perfectly legitimate reasons for this, for example average experience/years worked may be higher, responsibilities may be greater… but a priori, who knows?)
  • As you can see, the gap has widened, not narrowed over the decade. In fact, in euro terms, it widened 8 years out of 10! And after the two years of greater private sector increases (prizes for eyesight if you can spot them on the graph), there were huge increases in public sector pay the following year.
  • Public sector pay is at least five years ahead of private sector pay. What public servants earned in 2003 took their private sector counterparts until 2008 to earn (in fact, they’re not even there yet, another €500 or so to go!).

With the Live Register now rocketing towards 400,000 and private sector wages now stagnant, bonuses disappearing, total earnings in the private sector are falling. Therefore, according to the principle of benchmarking, so must public sector wages. As they are paid €50,000 on average, compared to average wages of less than €38,000 in the private sector, this won’t be the biggest economic calamity to befall Ireland this year. Now, can we please incorporate this knowledge into our social dialogue?

* Public sector includes public administration and education, but excludes health. No data there for some reason. Private sector includes all sector apart from agriculture (again no data). Some other methodological notes: I have had to assume Q4 figures for 2008 equal to Q3 in some instances or just take the average for the first three quarters, as Q4 data are not yet out. Construction figures only start in 2004, while manufacturing/industrial wages end in 2007, so I have had to use rates of change for the remaining sectors in those time periods, but the level of wages is determined by the full sample of private non-agricultural wages.

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Westmeath says ‘Watch out below’! An updated heat-map of Ireland’s property market

A little behind schedule, given that the report is out a couple of weeks at this stage, but the latest Manyeyes visualization of Ireland’s property market is up here. The overview snap is below.

Heat map of price changes in Ireland's property markets

Heat map of price changes in Ireland's property markets

As you can see, all counties have notched up two consecutive quarters of price falls by this stage (Limerick was last to fall). Some counties are now on six quarters. It seems that those that fell first have fallen hardest – in the Midlands (defined loosely enough), Laois and Longford were among the first counties to register falls in asking prices. They have now been joined by neighbouring counties, which are among the worst affected so far by falling prices. Take Donegal, for example, which was among the last to give up rising prices, where they are now 17% lower than a year ago. In Westmeath, the figure is even higher (18.1%), which marks a huge slide of more than 10% in the year-on-year change from the previous quarter. Longford and Louth are also in the same range close to 17%.

Now, as for Tipperary and Waterford (and Limerick and Mayo, the other two counties where falls are still single digits)… Are sellers there living in a mild form of cloud cuckoo land? Even looking at fall-from-peak figures, rather than year-on-year, they’re still in single digit territory. Or perhaps they think that they’re more sheltered, because the overhang of property is not as severe as it is in the Midlands/North-West? Answers on a postcard…

(PS. Do people think that this heatmap should change from year-on-year changes to one masuring the fall from the peak instead? That might give a better idea of total adjustment. Biggest adjustment so far is still Westmeath, down 20.0% exactly.)

Ireland: the Britney Spears economy? The Daft Report (2008 in review)

This is an unabridged version of my commentary on the latest daft.ie report (2008 in review), which is available at daft.ie/report.

When we look back at 2008 in a few years time, I think it’s fair to say we will regard it as the annus horribilis for Ireland’s property market. In late 2006, we issued a report which was the first to spot a slowdown in the property market. At the time, it was our view – unpopular though it was – that rising interest rates and high levels of supply would lead to a levelling off in house prices. This turns out to only have been the start of the story.

Ireland has become a bit of  Britney Spears economy. Bursting onto the world stage at the end of the 1990s, Ireland was heralded as an economic phenomenon and rapidly became a global superstar and poster-child for economic development. But recently it looks like it’s all just falling apart. Nowhere is this more evident than in Ireland’s housing market – until recently the engine of Ireland’s economic growth. House prices have fallen significantly from their 2007 peak, with trends in Ireland’s property market driven by the ongoing effects of overproduction of housing, combined with extraordinary international economic developments.

As the daft.ie review of Ireland’s property market in 2008 shows, asking prices for Irish property fell on average 15% during the last year. That makes 2008, in many ways, the opposite of 2006. While asking prices were static throughout 2007, the 12 months of 2008 have seen the typical home lose just over €50,000 in value, almost the exact amount gained in 2006. Ireland’s average asking price of €295,000 in December 2008 is almost exactly the same as that in January 2006. Even the property market’s quarterly trends were like 2006 in reverse.

The early part of the year was marked by uncertainty about growth in developed economies, as ongoing financial turmoil took its toll on share prices and the dollar. There was still a widespread belief, however, that emerging markets would take up the slack and that we were experiencing a blip rather than a derailment. Asking prices therefore eased back just 1.4% in the first three months of the year. As summer came along, though, it seemed that we were entering a new economic era, one of $200 oil and inflation. As this sank in, confidence took a further hit. Asking prices fell twice as fast between April and June as they had done in the first quarter, with the outer commuter counties of West Leinster, more dependent on petrol prices than elsewhere, particularly badly hit.

As autumn descended, the full extent of the financial crisis was revealed. Long-standing banks and investment houses were wiped out or nationalised on a weekly, if not daily, basis. House prices fell almost 4% in the three months between July and September as a result. There was still a feeling, however, that the financial and real economies, or Wall Street and Main Street as they were dubbed, worked in somewhat separate spheres. As the year came to a close, however, the full impact of the financial crisis on the real economy was becoming apparent, with job losses in retail, catering and manufacturing. The largest fall in asking prices, almost 6%, has come about in the final months of the year (just as the largest rise occurred in the first part of 2006).

South County Dublin has been in many ways the flagship of Ireland’s property market. Average asking prices in the area rose from €530,000 in early 2006 to over €680,000 by mid-2007. They have fallen steadily since then and in late 2008 fell over €50,000 to stand very close to their early 2006 levels. Elsewhere around Dublin, the fall from the peak has been in the region of €70,000 to €80,000. Outside the capital, falls in asking prices of between €40,000 and €50,000 from peak values in mid-2007 are more typical.

A range of global economic developments has made it necessary for countries around the world to revise down their growth estimates over the coming years. Russia, which earlier in the year had been expecting growth in 2009 of perhaps 7%, is now fighting talk that it is already in recession. The US may experience its first two-year recession for some time, while the IMF believes that the world as a whole will be in recession next year, according to its definition of global growth of less than 3%.
Ireland was delicately poised atop recent global economic trends. Its two major currency exposures are to the dollar and to sterling, so recent depreciations of both are having a major impact for Ireland’s exporters.

In the midst of all these external developments, Ireland’s domestic sector – so heavily reliant on construction for employment, wages, tax revenues, and general sentiment – has contracted sharply. The government budget shortfall for the year totalled €8bn, with likely implications for public sector pay and employment in 2009 and 2010. It is likely that net migration will change from large inflows in 2007 to outflows in 2009, particularly as unemployment looks likely to reach double digits at some point in the next few months.

What do all of these local and global trends mean for homeowners and prospective first-time buyers? To see where the property market will go next – and when it is likely to recover – it is necessary to look to the past as well as to the future. Over the past few years, Ireland has built perhaps twice as many houses as it needed, due in large part to tax incentives. Between 2005 and 2007, a quarter of a million new homes were built in a country that only had 1.4 million households in 2005. Worse still, due to the nature of the tax incentives, many of these properties were built in areas that did not need them. It stands to reason that if you build twice as many houses as you need for three years, you’ll need to build half as many as you need for six years to get back to equilibrium.

So should we write off Ireland’s property market until 2015? Not necessarily. It’s likely that prospects will vary from region to region. As outlined above, areas like South County Dublin are certainly feeling the pinch now, falling almost €150,000 on average from peak values. In such areas, prices are determined less by wages and interest rates, and more by expected future value and confidence. Therefore, whenever sentiment eventually reverts to a more optimistic outlook, those areas are likely to rebound faster. With the government seemingly tied into a pro-cyclical trap and not able to implement an economic stimulus package, due to large increases in public expenditure in the good times, it is of course an entirely different question whether lower interest rates will be enough to kick-start sentiment in Ireland.

In other regions, the long-term prognosis is very different. For properties close to centres of employment, four elements – employment, wages, interest rates and access to finance – will be crucial. Other areas, suffering from a glut of properties, may need a longer or a larger adjustment. Ballpark figures, based on the 2006 Census and daft.ie listings, suggest that as much as 10% of properties are for sale in counties like Roscommon, Cavan and Leitrim, compared to less than 5% elsewhere. It won’t be impossible to sell properties in these counties in coming years, but sellers must be realistic about the value of their property in a flooded market.

As I mentioned at the start, Ireland has been in many senses the Britney Spears of the world economy over the past ten years. Bursting on to the scene in the late 1990s, we earned worldwide recognition for how much we achieved so fast from such humble beginnings. With all this fame, it was perhaps to be expected that we lost our way in the early years of this decade. Recently, things have got a lot worse. With bank bailouts, budget debacles, job losses and public sector cuts, we’ve been through it all. Nonetheless, like Britney, while a lot of damage has been done, with good management, we can look ahead and spot elements of a brighter future – just look at the cost of petrol, mortgages, food or clothing now compared to a year ago. Ultimately, with the resolve to put right what needs to be fixed, and with a far better starting point than we had in the mid-1980s, we have to be confident about our prospects for the future.