Productivity in Ireland 2018

Source publication: National Income and Expenditure 2018 Tables 1-22 and Annex 1 for 1995-2018 (XLS 396KB) , Macroeconomic Scoreboard

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Nominal unit labour costs (ULC), which are explained in more detail in the appendix, are comparable to labour productivity trends. Nominal unit labour cost measures nominal hourly employee compensation relative to real labour productivity. Growth in an economy’s unit labour cost suggests that nominal employee income is rising relative to real labour productivity, resulting in decreased competitiveness. On the other hand, a decline in unit labour cost suggests that nominal labour compensation is declining relative to labour productivity, resulting in increased competitiveness. In 2018, unit labour costs declined even further on 2017, recording a result of -2%, indicating increased competitiveness. All the inputs of COE, Employee and Self-Employed numbers as well as GVA recorded growth in 2018 contributed to this result. The result has also been supported by the strong results recorded in sectors such as Manufacturing and ICT.

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The above chart explains the relationship between nominal employee compensation and labour productivity and provides more information on the drivers of nominal unit labour cost. In 2018, unit labour cost growth recorded a result of -2%. This is explained by labour productivity growing faster at 4% than the growth in wages of 2%, resulting in increased competitiveness. The foreign dominated sectors behind the strong labour productivity growth are presented in Chart 2.7, The chart is quite striking, showing the decreased competitiveness in the years prior to 2008 associated with increased growth in employee compensation and linked to increased wage inflation in the period. However, the increased competitiveness since 2009 has been linked to falling wages and a low inflation environment, as well as some sectors becoming more capital intensive, such as the Construction and Manufacturing sectors.

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Nominal unit labour cost in the Domestic and Other sector grew at a rate of 1%. This growth has come entirely from wages, while labour productivity recorded no growth. The reason for the absence of growth has been accounted for by similar increases in both GVA growth and hours worked of 3.8%. The same picture emerged for the total economy, where decreased competitiveness was associated with high levels of wage growth in the early noughties, while the post-crisis period has experienced lower levels of wage growth associated with increased competitiveness. In 2010, unit labour cost recorded the lowest growth. This is illustrated in the chart, where labour productivity spiked at over 10%, while employee compensation fell by 4%, as large numbers became unemployed in sectors such as Construction.

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The chart above shows growth in unit labour costs in some sectors in the Domestic and Other sector in 2018. During this year, the Electricity, Gas and Steam sector, as well as the Construction sector, were the least competitive with growth in unit labour costs of 5% and 3% respectively. The Electricity, Gas and Steam sector experienced a 6% fall in labour productivity, while labour productivity declined in the Construction sector by 2%. As wages were rising faster than labour productivity in these sectors, competitiveness decreased. Transport and Storage and the Accommodation and Food sectors were the most competitive in 2018, reflected in a negative result of -3% in unit labour costs. In fact, Labour productivity grew at 1% and wages per employees fell by 3% in the Transport sector, while labour productivity was unchanged in the Accommodation and Food while wages per employee fell by 3% in the sector.

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Changes in nominal unit labour cost have been far more volatile for the Foreign sector than the Domestic and Other sector. Unit labour costs declined by 4% in 2018 due to labour productivity growing faster than growth in wages paid. This is indicative of a sector that is predominantly capital intensive, where additions to GVA result in increased labour productivity. In general, the Foreign sector has had large and intermittent decreases and increases in nominal unit labour cost over the period. For example, in 2002 there was a 14% decrease in ULC, largely due to a 20% increase in labour productivity, while 2009 was the only year that had a small fall in employee compensation, largely due to a reduction in the labour force.

Source publication: Macroeconomic Scoreboard

Get the data: Eurostat

This chart compares cumulative growth in nominal ULC for Ireland compared to the rest of the EU. Ireland was the only country in the EU to have had a cumulative fall in nominal unit labour cost over the entire period. This amounted to a 6% decrease over the period and was driven by developments in the Foreign sector of the Irish economy as dramatic increases in GVA and profits occurred and wages were relatively unchanged. These increases in profits are explained by the additional earnings leveraged off the large additions to capital stocks in the foreign sector. Of the 25 countries detailed in the chart, Ireland was the most competitive^[1] country and the Foreign sector was more competitive than the country as a whole. The Domestic and Other sector had the ninth lowest growth in unit labour costs over the period. This has resulted in reduced competitiveness when compared with countries such as Cyprus, Germany and France.

[1] A careful interpretation of competitiveness is required for Foreign Sector in Ireland in this example. The onshoring of IPP has resulted in dramatic increases in income flows which are driving down unit labour costs compounded by no significant change in employment being associated with these balance sheet developments.