Productivity in Ireland 2020

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Nominal unit labour cost growth is shown above for the total economy. In 2020, nominal ULC declined by 6.9%. This was the most negative result recorded since 2015 and is normally a sign of increased competitiveness. However, due to the pandemic unit labour costs rose in many Domestic sectors where wages paid were supported by the Employment Wage Subsidy Scheme (EWSS). Employment costs increased in sectors such as Accommodation & Food and Transport as Government interventions meant workers in these sectors were paid a wage irrespective of whether they were producing any output. The dominance of the highly productive foreign sector in the Irish economy ensured unit labour costs in sectors such as ICT and Manufacturing: Foreign fell in 2020 as output increased.

Over the entire period, the economy has gone through phases of increased and decreased competitiveness, as the economy has recovered from recession and experienced extreme globalisation events.

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Figure 5.2 presents the nominal ULC for the total economy for the period 2011-2020. Nominal ULC was €0.34 per unit of output in 2020, continuing its overall downward trend. Falling ULC is indicative of increased competitiveness in the Irish economy, and the fall in 2020 was largely due to the considerable increase in labour productivity of 14.1% as seen in previous chapters.

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Growth in nominal ULC can be calculated as the difference between the growth in hourly compensation and growth in labour productivity. Figure 5.3 examines this relationship between these two variables and shows the growth in nominal ULC for the total economy. In 2020, nominal ULC fell by 7%. This was due to growth in labour productivity (14.1%) outpacing growth in hourly labour compensation (7.1%). As seen in Chapter Two, much of this increase in labour productivity was attributable to significant GVA growth in the Foreign sector, as well as to falling hours in less productive sectors such as Transport and Accommodation and Food.

The relationship between hours and employment during the COVID-19 pandemic has already been explained in Chapter One. Hours worked fell more sharply than employment levels due to the EWSS supports availed of by many sectors in 2020. This led to increases in hourly compensation despite a decrease in overall wages paid in those sectors.

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Nominal ULC growth in the Foreign-dominated sector has been highly volatile since 2015. ULC in the sector fell by 14.2% in 2020. While hourly compensation increased by 4% during this period, labour productivity grew significantly by 18.2%, leading to increased competitiveness in the sector. The strong labour productivity growth in 2020 is on the back of a huge increase of 24.6% in GVA for the Manufacturing: Foreign sector. As mentioned in previous chapters, this growth in GVA was largely explained by the COVID-19 pandemic which led to a surge in demand for pharmaceutical products. 

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Nominal ULC growth in the Domestic and Other sector is illustrated in Figure 5.5. In 2020, nominal ULC in the sector experienced significant growth of 6.2%, implying that the sector became less competitive compared to the previous year. Hourly compensation rose by 6.9% in 2020, while labour productivity only grew by 0.7%. Many of the industries in the Domestic sector saw reductions in output due to the COVID-19 pandemic. As a result, Accommodation & Food and Transport in particular saw the largest increases in nominal unit labour costs in 2020. 

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Figure 5.6 shows growth in the nominal ULC for Domestic and Other sectors in 2020. Transport (51.8%) had by far the largest increase in ULC, while Water Supply, Sewerage & Waste Management (20.2%) and Accommodation & Food (20%) had the next largest increases in nominal unit labour costs. The only sectors that had a fall in nominal ULC were Mining & Quarrying (-41%) and Arts & Entertainment (-5%).

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The chart above shows a country comparison of average growth rates in nominal unit labour costs for the period 2011-2020. Ireland was the most competitive among the countries shown with a result of -3%, followed by Greece and Cyprus. Ireland-Foreign reported a result of -5.5% for the period, however this result needs to be carefully interpreted due to the impact of onshoring of IPP since 2015. These imports have resulted in dramatic increases in income flows which are increasing labour productivity and driving down unit labour costs, particularly where no significant change in employment occurred. Ireland-Domestic and Other reported a result of 0.7%, in line with countries such as Spain and Denmark.