Abstract
81. This chapter briefly reviews some recent changes of relevance to the performance of the labor market, focusing on changes in earnings across sectors, and tax measures directed at improving incentives to work. Over the last decade the sectoral income distribution has changed considerably. Wage differentials among public service, and financial sector employees and of skilled workers in the construction industry have narrowed, while the increase in earnings of unskilled construction workers and manufacturing sector employees was relatively modest. This indicates that while the policy of wage moderation was in general more effective in the tradeables than the non–tradeables sectors, it did not unduly compress skill differentials. In fact, the earnings of relatively skilled workers grew faster than those of unskilled.
V. Developments in Wage Differentials and taxation of labor income Under the Centralized Wage Agreements39
81. This chapter briefly reviews some recent changes of relevance to the performance of the labor market, focusing on changes in earnings across sectors, and tax measures directed at improving incentives to work. Over the last decade the sectoral income distribution has changed considerably. Wage differentials among public service, and financial sector employees and of skilled workers in the construction industry have narrowed, while the increase in earnings of unskilled construction workers and manufacturing sector employees was relatively modest. This indicates that while the policy of wage moderation was in general more effective in the tradeables than the non–tradeables sectors, it did not unduly compress skill differentials. In fact, the earnings of relatively skilled workers grew faster than those of unskilled.
Sectoral Distribution of Average Weekly Earnings 1/
(In percent of earnings in the public sector)
Averages for the year. The cumulative changes shown in this tabulation relate to gross pay. Reductions in the level of both personal taxes and social security contributions mean that “take home” pay has been growing faster than gross pay.
Sectoral Distribution of Average Weekly Earnings 1/
(In percent of earnings in the public sector)
| 1988 | 1991 | 1993 | 1995 | 1997 | ||||
|---|---|---|---|---|---|---|---|---|
| Public service | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | |||
| Financial sector | 108.3 | 101.7 | 102.8 | 100.9 | 98.1 | |||
| Manufacturing | 74.4 | 70.3 | 69.3 | 69.0 | 66.9 | |||
| Building and construction | ||||||||
| Skilled workers | 77.8 | 76.6 | 81.4 | 86.0 | 93.5 | |||
| Unskilled workers | 67.2 | 65.5 | 66.1 | 71.2 | 72.5 | |||
| Memorandum items: | ||||||||
| Cumulative changes since 1988: | ||||||||
| Public sector earnings | 19.3 | 32.6 | 40.1 | 53.1 | ||||
| Financial sector | 12.0 | 25.9 | 30.5 | 38.7 | ||||
| Manufacturing | 12.8 | 23.6 | 30.0 | 37.7 | ||||
| Building and construction | ||||||||
| Skilled workers | 17.5 | 38.7 | 54.9 | 84.1 | ||||
| Unskilled workers | 16.1 | 30.4 | 48.4 | 65.1 | ||||
| GNP | 26.8 | 44.2 | 73.5 | 109.0 | ||||
| CPI | 11.0 | 16.1 | 21.8 | 25.5 | ||||
Averages for the year. The cumulative changes shown in this tabulation relate to gross pay. Reductions in the level of both personal taxes and social security contributions mean that “take home” pay has been growing faster than gross pay.
Sectoral Distribution of Average Weekly Earnings 1/
(In percent of earnings in the public sector)
| 1988 | 1991 | 1993 | 1995 | 1997 | ||||
|---|---|---|---|---|---|---|---|---|
| Public service | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | |||
| Financial sector | 108.3 | 101.7 | 102.8 | 100.9 | 98.1 | |||
| Manufacturing | 74.4 | 70.3 | 69.3 | 69.0 | 66.9 | |||
| Building and construction | ||||||||
| Skilled workers | 77.8 | 76.6 | 81.4 | 86.0 | 93.5 | |||
| Unskilled workers | 67.2 | 65.5 | 66.1 | 71.2 | 72.5 | |||
| Memorandum items: | ||||||||
| Cumulative changes since 1988: | ||||||||
| Public sector earnings | 19.3 | 32.6 | 40.1 | 53.1 | ||||
| Financial sector | 12.0 | 25.9 | 30.5 | 38.7 | ||||
| Manufacturing | 12.8 | 23.6 | 30.0 | 37.7 | ||||
| Building and construction | ||||||||
| Skilled workers | 17.5 | 38.7 | 54.9 | 84.1 | ||||
| Unskilled workers | 16.1 | 30.4 | 48.4 | 65.1 | ||||
| GNP | 26.8 | 44.2 | 73.5 | 109.0 | ||||
| CPI | 11.0 | 16.1 | 21.8 | 25.5 | ||||
Averages for the year. The cumulative changes shown in this tabulation relate to gross pay. Reductions in the level of both personal taxes and social security contributions mean that “take home” pay has been growing faster than gross pay.
82. The tabulation above also suggests that the growth in average wage earnings lagged considerably behind the increase in GNP. This has recently fueled demands for additional wage increases, and the wage drift under Partnership 2000 (P2000) is evidently stronger than under the previous agreement. The wage increase has been significantly inflated by increased overtime and special settlements: with employment broadly unchanged, the public sector wage bill increased by 10½ percent in 1997; and in building and construction wages were 19.1 percent higher in the fourth quarter of 1997 than in the fourth quarter of 1996. An almost 20 percent wage increase granted to nurses and paramedics, as well as an 18 percent special pay increase granted to electricians are responsible for much of the overall pay increase in the public sector and in construction in 1997. The situation did not change in 1998: a recent wage settlement with the security forces entailed an average wage increase of 9 percent, including the renegotiation of pay increases under the previous centralized wage agreement and a regular pay increase under P2000. An additional wage increase due to productivity growth is to be negotiated before the end of the year.
83. The modest average growth in earnings, suggested by the tabulation, does not reflect accurately the growth of disposable incomes of wage earners. Under the terms of centralized wage agreements, moderate wage increases have been combined with cuts in personal taxation. All groups of the population gained substantially from the tax cuts over the last 10 years: average tax rates declined from 26.2 percent in 1987 to 21.6 percent in 1998.40 The decline in the average marginal rate of taxation from 43.1 percent in 1987 to 33.2 percent in 1998 had a positive effect on incentives to work and has probably contributed to the gradual increase in the female labor force participation rate.
84. Nonetheless, the “effective” marginal rates of taxation of low to moderate incomes remain relatively high, owing to the system of tax exemption limits, marginal tax relief and child additions. Marginal relief is designed to avert a sharp increase in tax liability (if computed by applying the standard rate to income net of allowances) as income passes the exemption limits. The 40 percent marginal relief faced by low–income workers significantly reduces their work incentives, since they would be exposed to an aggregate marginal tax rate, including social security contributions, of almost 48 percent. Tax measures taken in the 1998 budget are likely to improve incentives to take up low–paid jobs. The reduction in the number of taxpayers on the marginal relief, and of those who are tax exempt, is likely to reduce the unemployment trap.
Categories of Personal Income Taxpayers
(In percent of total number of taxpayers)
Categories of Personal Income Taxpayers
(In percent of total number of taxpayers)
| 1997 | 1998 | |
|---|---|---|
| Exempt | 31.3 | 30.2 |
| Marginal relief | 11.6 | 8.5 |
| Standard income tax rate (24 percent) | 51.4 | 53.3 |
| Top income tax rate (46 percent) | 37.0 | 38.1 |
Categories of Personal Income Taxpayers
(In percent of total number of taxpayers)
| 1997 | 1998 | |
|---|---|---|
| Exempt | 31.3 | 30.2 |
| Marginal relief | 11.6 | 8.5 |
| Standard income tax rate (24 percent) | 51.4 | 53.3 |
| Top income tax rate (46 percent) | 37.0 | 38.1 |
85. The 1998 budget has also changed the calculation of the family income supplement from gross income to a net income basis, which is important for improving the incentives to work for those on low incomes. The increase in personal allowances, and a 2 percentage points reduction in the standard income tax rate are likely to work in the same direction. However, incentives to work could be further improved through a widening of the standard income tax band.
86. Work incentives and employers’ incentive to hire unemployed workers are strengthened by the new initiative—“Job Assist”. As part of the initiative, a special tax allowance of IR£3000, and an additional allowance of IR£1000 per child, are to be granted to long–term unemployed returning to work, during their first three years of employment. Employers, hiring long–term unemployed are exempt from contributing to the pay–related social insurance system for up to 3 years, if the former unemployed stays at work.