Why are businesses going out of business?

Michael Taft01/06/2011

Michael Taft: To listen to employers’ groups and Minister Bruton, you’d think that businesses are going out of business because the lowest paid workers in the economy are too highly paid. This argument has to ignore the EU Commission’s data showing that labour costs in the Irish hospitality and wholesale/retail sector are below the EU-15 average. This also ignores the fact that labour costs in these two sectors have already fallen by between 4 and 5 percent; if cutting labour costs will result in job retention and business survival why hasn’t it already?

So, if it’s not labour costs or high wages in the low-paid sectors, what is the problem? The answer is rather straight-forward: fewer customers spending less money.

We fail to appreciate the scale of the economic collapse in Ireland in comparison with other Eurozone countries: GDP, investment, etc. In particular, we fail to appreciate the collapse in consumer spending. In the three year period of our recession 2007-2010, Irish consumer spending has fallen in real terms by -10.2 percent. In the Eurozone, consumer spending has actually increased marginally by 0.1 percent.

In 2010, we spent €12 billion less than in 2007 – a fall in nominal terms of -13 percent. That is one heck of a hit for business reliant upon domestic demand to absorb – and many of them couldn’t.

The collapse in Irish consumer spending in unprecedented among the original Eurozone countries; there is nothing to compare to our experience – though Greece, a latecomer to the recession, looks set to see consumer spending fall by -13 percent in real terms up to 2011

The next couple of years aren’t going to provide much relief for domestic businesses. Up to 2012, the EU projects Irish consumer spending to fall a further -3 percent. The Eurozone, on the other hand, is expected to grow by 2 percent. Europe goes forward; Ireland lags further behind.

The demands for more pay cuts and Minister Bruton’s proposals are likely to exacerbate this situation. With more taxes coming down the line (the household/utilities charge) combined with rising interest rates and inflation are going to squeeze consumer spending even further. And then there is the precautionary saving arising out of concerns over pension funds, children’s education costs, nursing home costs and rising health insurance premium – a lot of social uncertainty compounding economic uncertainty.

Put simply, businesses are going out of business because there are fewer customers spending less money – whether that’s due to unemployment, emigration, falling disposable income (through tax increases), savings due to fear, etc. If you don’t fix that problem, that problem will persist.

But let’s not be seduced by the argument that if only we could ‘create’ certainty, then all those household savings could be unleashed into the market and growth would be restored. Consumer spending falls are as much a result of the economic collapse as a cause.

Sustainable recovery will occur when we drive up investment (whose collapse puts the fall in consumer spending in the shade). This will drive employment and productivity. More importantly, this will drive sustainable wage-led consumption, rather than credit-led consumption.

We need a different mind-set to the crisis than the one we’re being treated to. In short, when you deflate the economy and wages, you will crash consumption which will feed into further collapse.

In this context, if you believe cutting wages is a means to increase employment is not an exercise in economics. It is an exercise in alchemy.

Posted in: Labour marketInvestmentLabour market

Tagged with: Wagesemploymentinvestment

Michael Taft     @notesonthefront


Michael Taft is an economic analyst and trade unionist. He is author of the Notes of the Front blog and a member of the TASC Economists’ Network.



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