Labour costs during the crisis

Following the spate of bad news from the financial markets at the beginning of last week, the head of the European Central Bank made it a point to state that the ECB will do anything to save the euro.

That was then followed by a number of statements all with very positive intentions from German Chancellor Angela Merkel, French President François Hollande, and Italian Prime Minister Mario Monti.

They all stated that they would stand by the euro such that it will be saved from the attacks of speculators.

Mr Monti has now lobbied the Finnish government to make sure that the decisions taken at the last European Council are implemented without delay.

The sticking point seems to be whether the European Central Bank should be allowed to buy sovereign bonds to maintain a sustainable level of interest rate spread between the German bonds and those of other countries.

Two days ago, the German Central Bank expressed itself, yet again, against such a decision, in spite all the positive messages coming from Mrs Merkel.

The US Treasury Secretary, Tim Geithner, was in Europe this week to encourage political leaders to continue with their reform efforts to stabilise the global and European economies and to move towards closer integration.

Meanwhile, the impact of what is turning out to be either a very prolonged international recession or a double dip recession, is starting to emerge.

Unemployment remains very high, with some countries now well over the 10 per cent mark.

The European Commission also reported that the level of business confidence in the eurozone area, has fallen to its lowest level in three years. Another area where the impact is being felt is labour costs.

A report has shown that during the four-year span from the end of 2007 to the end of 2011, unit labour costs fell by 6.3 per cent in Ireland, the largest reduction that this report has found.

In the manufacturing sector, unit labour costs have fallen by over 40 per cent.

Ireland is now considered the most cost-efficient manufacturer in the EU, when judged by low labour costs, doing better than traditionally low-cost countries such as Poland. The UK and Spain are experiencing a similar situation, even if to a smaller extent.

One may argue that such a development is indeed very bad news, as it indicates a fall in the standard of living of the population of these countries.

It may also been seen as bad news because the drop in labour costs has occurred because labour markets are fairly flexible. In fact, during this same four-year span, unit labour costs in countries like Italy, Portugal and Greece have gone up because their labour markets are quite rigid.

As the recession has continued to bite, the rate of increase has slowed down considerably in these countries.

On the other hand, one may also argue that this may not be such bad news, as Ireland has responded to the international recession by seeking to regain its competitiveness, with the result that its exports would increase.

The increase in exports would create more jobs and more wealth.

Countries like Germany and Finland have not had to face these issues and their labour costs have risen by more than the eurozone average.

The data on Malta shows that average wages between the end of 2007 and the end of 2011 increased by 13.7 per cent.

Some may judge this to be too little while others may be abhorred by such a figure as they feel that it is not sustainable if we want our businesses to remain competitive.

This latter group would argue that one day we could be facing a loss of jobs as a result of high wages.

As usual there is a balance that needs to be achieved between the level of wages and the level of job creation.

A higher level of wages could prove to be an inhibiting factor in the creation of jobs. On the other hand, higher wages guarantee a higher standard of living for employees and their dependents.

Yet it is worth noting that up to a few years ago, as a country we used to look at Ireland as our benchmark.

The tables seem to have been turned as Ireland experienced a decrease in labour costs, while Malta has experienced an increase – not an insignificant fact that should not be taken for granted.

This has been partly due to a higher level of value added in our economy, resulting from increased productivity, increased efficiency and an enhanced level of skills – making it possible to increase labour costs during an economic crisis.