Ireland is a High Wage and High Price Economy

The euro is now is its seventeenth year and although consumer prices across the zone have shown some convergence  there is still a wide divergence and one that has actually grown again over the last five years. Prices in Germany and Italy in 2013 were around the euro average, in France  7% above and in Spain 9% below. Finland is the most expensive country  (20% above the euro norm) followed by Luxembourg, with Ireland in third place; prices here are 17% above the average in the euro area. For those looking for a cheap holiday, prices in the Baltic states are 30%-40% below average , or for a warmer climate, Portugal and Slovenia ( around 20% cheaper than the norm)

Ireland’s inflation rate, as measured by the HICP,  generally outpaced its euro neighbours in the first decade of membership but fell below the euro average from 2009 to 2013. That latter period of price convergence is not as apparent  when measured on the broader household consumption deflator  used by Eurostat for comparative purposes, although it also shows that Ireland’s relative price position has improved, with the  current 17% differential  compared with over 23% a decade earlier and 19% in 2009.

Prices in Ireland are also substantially higher  when measured at the micro level, as confirmed by a recent ECB  survey (1) of grocery prices across the single currency area,  using data from 2011. That found prices  in Ireland on a basket of household  items  to be 17% above the euro average and a massive 32% for branded goods only, and that excludes VAT. The study found that competition at the retail level had a role to play  in explaining cross-border price divergence, alongside consumer shopping patterns ( the degree to which people buy in bulk for example) but macro factors such as the level of national income play a strong part.

One would therefore expect to find a close relationship between the price level and  the wage level in a given economy , as the latter  is the main cost of production and  as well as a key determinant of household incomes. That does appear to be the case; there is a 96% correlation between the price data discussed above and wage levels across the euro area as revealed in the latest Eurostat  data on hourly labour costs for 2014 ( the survey  excludes agriculture and public administration)

The figures reveals that in Luxembourg hourly wages are 45% above the euro average, with Belgium in second place at 32%. Given the price data one would expect to see Ireland towards the top of the wage league and that is indeed the case; hourly wages in Ireland were €25.8 against an average of €21.4  or 20% above the euro norm. That is an average figure ,of course, and hides a wide distribution around the mean, but it is undeniable that the average wage level in Ireland is among the highest in Europe.

Against that, the non-wage  cost of employing labour here (mainly employers PRSI) is remarkably low , and at 13.5% of total labour costs is around half the euro area average. Consequently, Ireland’s overall ranking in terms of  labour cost is very different to that using wages alone, with total  hourly labour costs less than 3% above the euro norm.

High wages, per se,  need not be damaging to competitiveness as long as they are supported by high productivity and that may well be the case in Ireland for some of the main export industries if perhaps less so for non-traded services. What is clear is that Ireland is a high wage and high price economy in the euro area ,  however uncomfortably that sits with the narrative some prefer, with implications for the type of industries and companies the country can attract.

(1) ‘Grocery prices in the euro area’, ECB Economic Bulletin No.1, 2015

Published by

Dan McLaughlin

Economics Lecturer and Commentator