Philipp Fink, Irish Income Inequality in:

Philipp Fink

Late Development in Hungary and Ireland, page 218 - 225

From Rags to Riches?

1. Edition 2009, ISBN print: 978-3-8329-4173-4, ISBN online: 978-3-8452-1720-8

Series: Nomos Universitätsschriften - Politik, vol. 168

Bibliographic information
218 4.4.4 Dichotomous Irish Industrial Structure As shown, the Irish state displayed a large capacity in attracting high technology FDI. It marketed Ireland as a stepping stone for TNCs to produce for the Single European Market. The resulting large levels of FDI inflows into the manufacturing sector had large positive primary effects. Indeed, the Irish economy is a far cry from the dismal situation of the 1980s. However, the positive development of the aggregate economic figures mask the duality of the Irish industrial structure. Contrastingly, in regards to the secondary effects of the high inflows of FDI, the state displays a low level of capacity to ensure a sufficient integration of TNCs into the Irish economy by forging substantial linkages between foreign-owned and indigenous firms. As a result, indirect and direct spillovers are small. The described performance differences between foreign-owned and indigenous firms lead not only to the conclusion that the recovery of the Irish economy was mainly the result of inflows of FDI, it also questions the developmental capacity of investing TNCs (Kirby 2004: 219). Again, the low level of linkages is related to the nature of the TNC, which is interested in safeguarding its knowledge-assets in order to defend its firm-specific and quasi-oligopolistic competitive advantages. Furthermore, despite the high technology nature of TNC products, the majority of affiliates located in Ireland are not involved in strategic high value operations classified by a large degree of R&D. Additionally, the possibilities for increased co-operation in previous TNC manufacturing strongholds are becoming increasingly slight, as global cost competition effects are transforming the respective sectors and the prompting relocation of foreignowned production plants to lower cost locations. Likewise, indigenous unattractiveness as TNC suppliers demonstrates the lack of state capacity to cater for the development of Irish enterprise. They are faced with continued barriers-to-entry into profitable operations due to their small scale and low endowment with capital and lack of cutting-edge production technologies and products. Hence, Irish industrialisation is Janus-faced (Ó Riain 2000: 183) and characterised by a growth process, which is heavily dependent on external inputs in form of demand for exports and foreign productive capital (O’Hearn 2001: 192-193). 4.5 Irish Open Inequality In the case of Ireland, social inequality has been a historic occurrence (Breen et al. 1990: 99-100). However, the high levels of economic growth in the 1990s have not led to a reduction in inequality. Rather, social inequalities have persisted, as the large inflows of high technology FDI induced a labour market demand shift in favour of highly qualified staff. Consequently, skilled remuneration levels increased, driven by rising educational pay differentials, and resulted in a dispersion of earnings and direct market incomes. Welfare and tax regulations have further exacerbated market inequalities, leading to a pronounced social dichotomy. Similarly, Irish 219 neo-corporatism did not counteract earnings inequality. As a result, social dualism matched industrial dualism. 4.5.1 Irish Income Inequality The development of earnings and incomes in Ireland has to be analysed against the background of the development of aggregate income figures. As a result of the large level of economic growth throughout the 1990s, GNP per head increased from 69% of EU-15 levels in 1991 to 106% in 2001 (Schröder 2005: 11). Aggregate income growth increased average disposable income, doubling from € 8,345 in 1991 to € 18,109 in 2001 (O’Donoghue/McDonough 2006: 46). However, the fact that Ireland transcended from being one of the poorest to one of the wealthiest EU member states within a decade does not mean that Irish society has become more equal. On the contrary, aggregate income figures mask the strong inequality of income and wealth in Ireland. Based on the simple distribution of non-equivalised disposable income, Ireland had the second highest Gini coefficient (0.324) after the US (0.368) amongst the industrialised OECD states in 2000 exceeding the OECD Gini average of 0.299 (Nolan/Smeeding 2004: 6). In Nolan and Smeeding’s (2004: 9) eight OECD country survey for the year 2000, the lowest Irish earner (10th income decile) had the second lowest annual disposable income of US$ 9,000. In contrast, the highest Irish earner had an income of US$ 41,500 exceeding all other countries except for Canada and the US. The income gap between the lowest and highest income groups stood at US$ 32,473 and was the second highest in the study only surpassed by the US. In terms of the dispersion of gross earnings or direct market income, Ireland displays the third highest levels of inequality compared to other industrialised OECD members following the US and Canada (Barret et al. 1999: 84). As shown by Barret et al. (2002: 668), economic recovery between 1987 and 1994 led to an increase in inequality. The earnings gap between top and bottom earners grew from 416% to 477% for all employees and from 368% to 406% for the full-time employed. The top 10% of earners substantially increased their income compared to the median and lower income groups. However, the ratios for the subsequent years show a slight decline in inequality. The earnings gap fell slightly for full-time employees by 13% between 1994 and 1997, falling more significantly after 1997. Incomes for the top decile of earners fell and the lowest earners were able to increase their income positions relative to the median for the first time in 2000 (Nolan 2003: 133). Internationally, Ireland resembles an international outlier in direct market income inequality (OECD 1996: 61).165 Although Irish wage dispersion in 1987 (90/10: 3.68) was the third highest after the US (90/10: 4.24) and Canada (90/10: 4.45) (Bar- 165 OECD comparisons are measured in weekly earnings for full-time employed (OECD 1996: ibid.). 220 ret et al. 2000: 132), Ireland experienced the greatest increase of wage inequality between 1987 and 1994 (O’Reardon 2001: 133). In difference to the other countries in the OECD study, the increase in distance of 15% between the median (50th decile) and the top income (90th decile) group was one of the largest recorded and only exceeded by Portugal (O’Reardon 2001: ibid.). In total, for the period from 1987 to 1997, the 25% growth in the earnings gap between the highest and lowest earning deciles in Ireland was only surpassed by the 37% increase recorded for the US (Barret et al. 2000: ibid). Two interrelated factors can be seen to be responsible for the patterns in direct market income inequality. The first is characterised by structural changes in the labour market and the second factor is defined by the institutionalised wage bargaining process. Labour Market Supply and Demand Factors Shifts in labour market supply and demand were the result of structural change driven by technological innovations and an augmentation of workforce skills (O’Reardon 2001: 135). As a consequence, the Irish labour force underwent a dramatic transformation. The expansion of the workforce was accompanied by a large increase in the supply of skilled labour during the 1990s. Between 1991 and 2001, the share of employed third level graduates grew from 20% to almost 30%. 45% of the positions created during the 1990s were filled by secondary level graduates. In contrast, the share of workplaces held by low qualified personnel with less than upper secondary education fell from 43% in 1991 to 32% in 2001 (NESC 2005: 25). As a result, the occupational structure of Irish society was transformed (Ó Riain 2004a: 140). Skilled positions accounted for 49% of all occupational categories in 2000. The share of managerial and professional positions doubled between 1973 and 2000, with the largest increase of 6% taking place between 1987 and 2000 growing from 17% to more than 23%. The proportions of skilled manual workers increased from 19% in 1973 to represent more than a quarter of the workforce by the year 2000 (Whelan/Layte 2004: 90). The increase in the supply of skilled labour in the 1990s was in part a consequence of the poor labour market situation throughout the 1980s. Lower skilled employees withdrew from the labour market via emigration or postponed their labour market entry by enrolling in further education. Increased labour qualifications were also the result of the state’s educational policies. As emphasised by Ó Riain (2004a: 147), the Irish state was particularly successful in manipulating the choice of third level education courses of prospective students towards the expansion of technical skill levels. Consequently, the supply of skilled labour rose by more than 72% between 1981 and 1991 and by a further 35% from 1991 and 1997 (Barret et al. 2000: 135). The proportion of low skilled labour fell due to the retirement of older workers (O’Reardon 2001: 135). 221 However, despite the expansion of skilled labour supply, educational differentials continued to grow between 1987 and 1997. Members of the labour force with university degrees experienced the largest increase in hourly wages, earning 86% more than lower qualified employees. Those with secondary education earned 37% more than those with only primary education (Barret et al. 2000: 137). The price increases for skilled labour are reflected in the widening of earnings for the top earning brackets between 1987 and 1994, as the majority of university graduates are situated in the top earnings deciles. The unabated increase in educational differentials points to unsatisfied demand for highly qualified labour. The large level of demand for skilled labour is a product of technological change, which in the case of Ireland is an exogenous factor. It resulted from the large inflows of predominantly high technology FDI into the manufacturing and financial services sector of the economy (Figini/Görg 1999: 595; O’Reardon 2001: 136). Not only do TNCs employ more skilled labour than indigenous firms, they also pay above average wages. TNC wages in the manufacturing sector were 25% higher than the average remuneration between 1991 and 2000 (Paus 2005: 122). The rise in wage dispersion was halted after 1997 and earnings inequality actually decreased slightly between 1997 and 2000. The reduction in wage dispersion of the top income brackets to the median is linked to an increase in high skilled immigrants. A large share of immigration was due to the “homing pigeon” phenomena, whereby emigrants having left Ireland during the economic crisis of the 1980s returned in the 1990s with improved skills and experience (Barret/Trace 1998: 46). Furthermore, 85% of the 72,000 non-nationals, who immigrated to Ireland between 1993 and 2003, were estimated to be high skilled (Barret et al. 2006: 12). Consequently, increased high skilled immigration, averaging 16,000 net per year between 1996 and 1999, led to an estimated 3% increase in the supply of skilled labour. As a result, educational differentials decreased by 4.7%, thereby reducing the gap between skilled and unskilled earnings by 4.5% (Barret et al. 2002: 675). Aside from the increase in professional-technical and managerial occupations, employment in services considerably expanded (Ó Riain 2004a: 140). Net job creation in market services grew by 89% and employment in construction increased by 162% between 1989 and 2001, greatly outpacing manufacturing employment growth of 38% (Fink 2004: 126). A defining factor of Irish employment growth during the 1990s is the strong increase in part-time, temporary and low paid employment, which is closely associated with the rise in tertiary and construction employment.166 Accordingly, the share of employees in part-time employment rose from just under 10% in 1990 to more than 18% in 2001 (OECD 2002b: 319). The high rise in part-time employment is generally the result of increased female participation in the 166 The threshold for part-time employment is set at under 30 working hours per week. Low paid employment is defined as employment for earnings under two-thirds and under 50% of the median weakly earnings (Callan et al. 2001: 9-10). 222 labour market, as 77% of the part-time employed were women in 2001 (ICSO 2002: 4). The extent of part-time, temporary and low paid employment is not restricted to indigenous or low technology sectors of the economy. On the contrary, over 50% of new employment generated by FDI inflows in 2000 was classified as part-time and temporary employment. The proportion of part-time and temporary employment has also been increasing in the manufacturing sector (Forfás 2001: 13). Nevertheless, these forms of employment dominate market services and construction. Part-time employment carries the increased risk of experiencing low pay, although not all low paid employees are employed on a part-time basis. The existence of low pay is strongly related to the increase in market services employment. With more than 20% of retail, insurance and finance employees as well as service workers and almost 19% artisans having experienced low pay in the mid-1990s (Nolan 1998: 96-97). In total, an estimated average of 20% of the workforce was classified as low paid between 1987 and 2000 (Barret et al. 2000: 141). Again Ireland was a comparative outlier, showing the third largest incidences of low pay in the OECD after Canada and the US (Callan et al. 2001: 10). The risk of low pay is closely associated with age, gender and qualifications. In terms of age, the majority of low paid are labour market entrants younger than 25 years old. Furthermore, women older than 25 and married women are at a higher risk of experiencing low pay than their male counterparts. In terms of qualifications, the low skilled with less than upper secondary education constitute the majority of the low paid (Barret et al. 2000: 141). Nevertheless, low earnings groups have been able to hold their ground and even achieve a slight improvement of their income positions relative to median earnings in 2000 compared to 1997 despite the large incidence of part-time employment. In part this development is linked to the ongoing high level of demand for unskilled and part-time labour as a result of continued economic growth and reflected by the expansion in service and construction employment. The increase in low income positions relative to the median earnings recorded in 2000 was partly the result of the constrained supply of unskilled labour leading to higher remuneration, but it was also a consequence of the introduction of the minimum wage in April 2000 (Nolan 2003: 133). Hence, the labour market developments responsible for the increases in earnings dispersions display an increasing segmentation. Ó Riain (2004a: 140) identifies the winners of the growth process as those high skilled members of the workforce employed in the tradable high technology and knowledge branches of the economy. O’Hearn (2001: 188) distinguishes between “Core” and “Peripheral” employment and incomes. “Core” employment comprises high skilled technical and organisational duties, similar to those undertaken in the home countries of TNCs. Managerial, administrative as well as professional and technical employment categories equal 36% of the labour force (ICSO 2002: 6). 223 “Peripheral” employment on the other hand is situated in low technology branches, defined by routine work carried out by low skilled on a part-time, temporary basis with a high proportion of low paid employment. These employment forms show lower tenure rates, as these employees face lower levels of job security leading to higher incidences of unemployment (Nolan 1998: 105; Callan et al. 2001: 29). Social Partnership The high level of earnings dispersion throughout the high growth phase of the 1990s questions the role of the institutionalised wage bargaining system. The neocorporatist process of social partnership is a “constitutive feature” (Kirby 2002: 135) of the Irish FDI-led development regime. The succession of national wage agreements is generally seen to be at the core of explaining the Irish success story of the 1990s (Hardiman 2002a: 3). However, Irish neo-corporatism represents an exception to continental European experiences, which are generally associated with combining economic growth with equality (Ó Riain 2004a: 138). Social partnership process has failed to effectively address the issue of rising earnings dispersions. Ireland had the highest levels of inter-industry and firm-related wage dispersions amongst corporatist OECD countries in the mid-1990s (Gannon/Nolan 2004: 176-177). Gannon and Nolan (2004: 173-174) found considerable remuneration differences attributable to labour supply constraints, productivity, workforce skills, workplace knowledge requirements and technology utilisation. Service jobs in retail, gastronomy and tourism as well as low technology manufacturing (textiles and clothing) were paid 30% to 40% below average wages. In contrast, wages in business services and high technology manufacturing were paid 30% to 40% above average remuneration levels. The limited ability of the social partnership process to counteract the dispersion in earnings is due to an underlying institutional flaw of Irish national wage agreements. Since 1987, unions have accepted low nominal wage increases and promised low militancy in return for income tax cuts, leading to an increase in real incomes and therefore disposable incomes (Ó Riain 2004a: 63). Wage increases originally acted as a ceiling in the first partnership agreements in order to manage economic recovery (Hardiman 2002a: 10). However, in the course of growing economic prosperity and in the advent of labour supply shortages, adherence to the agreed nominal wage increases waned and declined with the earnings guidelines increasingly acting as a floor (O’Reardon 2001: 136). Furthermore, national wage agreements suffer from a lack in compliance. Ó Riain (2004a: 138) cites a survey for the period 1991 to 1997 showing that 51% of respondents claimed that their remuneration complied with the terms of the national agreement. However, 44% stated that their pay exceeded the levels of the accords and 5% received earnings below the agreed pay levels. 224 These discrepancies are linked to the existence of loopholes in the national agreements allowing local bargains to be struck independently of the national accords (Ó Riain 2004a: ibid.). Consequently, highly skilled staff belonging to professional and managerial occupational groups is increasingly remunerated individually instead of collectively via the agreements (O’Reardon 2001: 137). Due to their ex-ante nature the national wage agreements were to a certain degree overrun by the performance of the economy. Increasing labour supply constraints rendered the agreed remuneration levels obsolete. Pay increases stipulated by the agreements were based on static labour force figures and on expectations for the future that were built upon past experiences (O’Reardon 2001: 137). Hence, the national wage accords were antiquated when they came into force, being “future-oriented but backward looking” (Hardiman 2000a: 294). Moreover, the agreements lack any provisions concerning the ongoing monitoring of compliance. The accords also fail to provide for sanction possibilities in case firms violate the terms of the agreements (Barret et al. 1999: 95). The social partnership process is further weakened by the conflict-ridden state of Irish industrial relations in general. Whilst the conclusion of national wage agreements can be interpreted as a sign for a high level of national social consensus, ongoing micro-level conflicts are disguised. Extending the provisions of the national agreements to the workplace remains problematic, as a result of the lack in sufficient employee representation and participation at the workplace (Hardiman 2006: 352). As a consequence, Ireland hardly fulfils the minimum EU requirements on workplace participation (Roche 2007: 70). Despite attempts by the state and trade unions to increase the amount of micro-level consultative and inclusionary decisionmaking, collaboration remains the exception with Irish employers preferring to follow exclusionary decision-making patterns (Hardiman 2002a: 15-16). Similarly, closely related to the issue of workplace participation, the social partnership process also suffers from a lack of trade union recognition by employers. Union recognition remains voluntary. More importantly, trade union acceptance is lowest in market services and the foreign-dominated high technology and high productivity manufacturing branches (Hardiman 2002a: 13; Ó Riain 2004a: 138). A survey cited by Hardiman (2006: 352) found that 65% of the foreign greenfield investment sites established between 1987 and 1997 were non-union firms. Only 15% of US TNCs in Ireland recognised trade unions. A different survey on the compliance of remuneration levels with the terms of the wage agreements for the period of 1991 to 1997 found a considerable wage drift between non-union and unionised firms (Barret et al. 1999: 95). In difference to 30% of employees in unionised firms, 63% of workforce members in non-union firms stated that their wages were in excess of the terms laid down in the accords (Barret et al. 1999: ibid.). Finally, the circumstances surrounding the formation of the social partnership process is seen to be responsible for its lack of redistributive focus (Roche 2007: 66). 225 Economic malaise in 1987 forced the social partners to the negotiation table. The attained agreement was dictated by the goal to regain Irish cost competitiveness. Subsequent accords repeatedly emphasised these goals, as wage moderation was traded for income tax reduction. In contrast, the issues of social justice were “treated as subsidiary to competitive imperatives” (Roche 2007: ibid.). Hence, as Nolan and Maître (2000: 341) note for Ireland, “centralised wage setting is clearly not enough in itself to limit the growth in earnings inequality.” 4.5.2 Social Implications Although earnings are influential in determining the levels of income inequality, they constitute only one of several income sources defining household disposable income. Disposable income dispersion is influenced by the distribution of additional market income sources, state transfers and income taxation (Nolan 2003: 134). In the case of Irish household disposable income dispersion, the level of income inequality derived from direct primary market income is mitigated to a certain degree. Primary market income positions based on educational differentials driven by TNCinduced technological change feed through to define the positions of households in terms of disposable income distribution. However, secondary market income and the state via social transfers and taxation increase market income advantages. Again education levels as well as employment status are decisive in determining the risk of experiencing poverty further demonstrating the segmentation of Irish society. Household Income Distribution When interpreting data on the distribution of disposable household income in Ireland, the increase in disposable incomes over the period under review should be kept in mind. As can be expected, the rise in aggregate disposable income translated into an increase in disposable household incomes during the 1990s. Accordingly, average weekly disposable income adjusted for household size rose by 44% from IR£ 129.45 in 1994 to IR£ 187.23 in 1998 (Layte et al. 2001: 13).167 The following table displays the decile shares of disposable income for Irish households following economic recovery and during economic expansion in the 1990s. 167 1/0.66/0.33 scale used to adjust household disposable incomes for equivalised size (Layte et al. 2001: ibid).

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Irland und Ungarn verfolgen eine Entwicklungsstrategie, die in bewusster Abhängigkeit von Globalisierungsprozessen in Form von ausländischen Direktinvestitionen steht und sich als Paradigma in der Peripherie durchgesetzt hat. Doch dieser Entwicklungspfad hat zu einer ungleichen und abhängigen Entwicklung geführt. Dies ist laut dem Autor das Resultat des mangelnden Gestaltungswillens beider Staaten, für einen gleichgewichtigen Wachstumsprozess zu sorgen. Die historische Analyse zeigt, dass eine auf ausländische Firmen fußende Entwicklungsstrategie nicht ausreicht, um traditionelle Peripheralität zu überwinden. Der Autor fordert eine Reform des Entwicklungsparadigmas, um eine gleichgewichtige Entwicklung zu ermöglichen.