Productivity in Ireland 2019

Source Publication: National Income and Expenditure 2019

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 The chart above shows the labour share in the Irish economy across both Foreign and Domestic and Other sectors. A declining trend has been observed in the two sectors since 2009, with a significant dip occurring in the Manufacturing sector in 2015, where the labour share fell to 11%. The labour share in the ICT sector has followed the same general downward trend as Manufacturing. In 2019, the actual difference between the labour share in ICT and the Manufacturing sector reduced to around 6%. This falling labour share in the foreign-dominated sectors is a result of the ongoing globalisation events since 2015 and may also be an indication of the increasing reliance of these sectors on capital intensive technologies.

The Domestic and Other sectors have not experienced the same declines in the labour share as those in the Foreign-dominated sectors. In recent years, the Construction sector experienced a reduction in the labour share from 73% in 2016 to 65% in 2017. This is a sign of the increasing reliance of the sector on capital technologies. Among the sectors under examination, Accommodation and Food recorded the largest labour share in the region of 80% in recent years. This is to be expected as the sector is largely a labour-intensive one. In 2019, Financial services recorded a labour share of 45%. The relative decline of the labour share of the Financial Services sector since its peak in 2013 (53%) indicates an increased reliance on technology, with a greater focus on automation. There has been a reduction in branch networks and increasing consolidation, leading to a declining reliance on labour to carry out daily activities.

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Figure 4.2 illustrates the labour share of the total economy and of the Foreign-dominated and the Domestic and Other sector. As expected, the labour share in the Domestic and Other sector is consistently much larger than that of the Foreign-dominated sector.  In 2019, the Domestic and Other sector recorded a labour share of 50%, while the Foreign-dominated sector recorded a labour share of 11%. This highlights the increasing importance of capital relative to labour in the Foreign-dominated sector.

The labour share in the Domestic and Other sector has been on a declining trend since 2010 to the current level of 50% in 2019. This falling trend has been driven by industries such as Construction, Wholesale and Retail and Accommodation and Food. The labour share in the total economy has also been on a declining trend, with a result recorded of 33% in both 2018 and 2019, the lowest recorded in the time series as a whole. As MNEs restructure their balance sheets and continue to relocate their assets to Ireland it is likely that the downward trend will continue in the labour share for the total economy.

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The labour share for the Market, and non-Market sectors, as well as the total economy, are illustrated in Figure 4.3. The labour share for the non-Market sector, which consists of Real Estate, Public Admin, Education and Human Health remained above 60% from 2008 to 2014 but has been on a steady decline in the last three years reaching a low of 53% in 2019. This is in line with reductions in the numbers employed and wages paid in the Education and Health sector. The presence of Real Estate in the non-Market sector reduces the labour share due to the relatively large profits associated with the sector, linked to imputed rents which are recognised as operating surplus. The labour share for the Market sector reduced from a peak of 53% in 2008 to 28% in 2019. The additions to Capital Assets as previously discussed are also the key factor behind this reduction for the labour share in the Market sector.

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The chart above shows how the labour share in Ireland compares with other countries in the EU. The data on each country’s GVA and Compensation of Employees (COE) has been obtained from Eurostat. Elsewhere in the publication the labour share of GVA is estimated using the OECD’s methodology (see Appendix for more details). In this section, the Labour share has been calculated as the ratio of COE to GVA^[1] ensuring consistency when comparing with other EU member states.

From the graph, Ireland’s labour share can be seen to be falling since 2015, however it has been significantly below the EU average since the start of the series. In 2019, the labour share for Ireland reached an all-time low of 30% down off a peak of 49% in 2010. The decline in the labour share in recent years has been due to the various reasons highlighted above, such as the large globalisation events in the economy in recent years leading to additions to capital stocks. Among the countries examined, Denmark recorded a consistently high labour share of about 60% since 2000. The labour share on an EU average basis has remained around 50% in the nineteen-year period, with Luxembourg and Austria remaining on par with the EU average.

[1] Elsewhere in the publication, labour share has been calculated using GMI, GOS, Taxes and Subsidies. The COE/GVA method has been employed in the international comparisons analysis due to unavailability of a disaggregated series on GMI and GOS on the Eurostat database. Please see appendix for full details and methodology on how the labour share has been calculated in the sectoral analysis.

Source Publication: Estimates of the Capital Stock of Fixed Assets 2019

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Capital stocks estimates for the Foreign-dominated and Domestic and Other sectors, as well as the overall economy are shown in Figure 4.5. Capital stocks in the Foreign-dominated sector have been relatively flat up to 2014, before a step change occurred in 2015. The reason for the step change is well-documented and is associated with many US multinational corporations adding large amounts of capital to their balance sheets from 2015 onwards in industries such as Manufacturing and ICT. This resulted in large imports of intellectual property and corporate relocations. At the same time, employment and COE remained relatively unchanged, thereby driving Ireland’s labour share downwards. Despite the change in capital stocks for the total economy in 2015, the Domestic and Other sector has remained relatively steady over the nineteen years. In 2019 the level of capital stocks was just under €1 trillion.

Due to the influence of capital stocks on the labour share, it is important to analyse COE and GVA at the sector level to see the inverse relationship between capital stocks and the labour share.

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The chart above shows COE growth in the Foreign-dominated sector and in the sectors of Manufacturing and ICT. Between 2008 and 2010, Manufacturing and the total economy experienced declines in wages linked to the financial crisis.  The ICT sector experienced falls in wages between 2002 and 2003, linked to the dot com bust, and subsequently in 2011, linked to the financial crisis. These declines in wages were associated with falling employment and a lowering of the labour share. Since 2015, wage growth in the ICT sector has exhibited steady growth of about 11%. The Manufacturing sector has been growing at around 7% a year on average since 2015, albeit with a slight dip in 2017, where wage growth was 5%. Similarly wage growth in the total economy has also remained strong growing at about 6% or above since 2015, bolstered by the strong growth in ICT and Manufacturing.

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The fall in the labour share in recent years, particularly for the Manufacturing sector is largely due to the fact that real GVA grew by over 65% in 2015 driven by large inflows of capital associated with the globalisation events of that year. Although the labour share for the ICT sector has consistently remained above that of Manufacturing, the sector also experienced large globalisation events that resulted in strong GVA growth since 2017. In both cases these globalisation events have either resulted in reduced royalty payments or increased royalty income and, accordingly, increases in GVA. The ICT sector has seen extraordinary GVA growth in last three years averaging approximately 20% per annum. Similarly, the labour share in the total economy has been decreasing since 2015, reaching a low of 33% in 2019. This can be seen in the chart above as over the last four years GVA growth has averaged around 11%.