Consumer prices versus wages in Ireland: either the price level falls, or wages rise?

[Protocol]

My contention is that consumer prices are too high in Ireland, relative to wages.

The price level in Ireland is second highest in the EU. The price level for HFCE is 137.1, behind Denmark at 145.1.

The high consumer prices are not mainly due to high labour costs.

Our labour costs are in eighth position in the EU, at €40.20 per hour. In particular, employer social contributions are not very high in Ireland.

The average full-time adjusted salary here is in third place in the EU, at €58,700 during 2023.

The FT adjusted salary in Denmark is 15% ahead of us, yet their price level is 5.8% above ours.


My suggestion is that we need lower consumer prices in Ireland, especially energy and rents.

Or else do we need higher wages?

 

[T McGibney]

Of course the tourist will want facts. He will principally want to know why taxation is so high, why Dublin is the most expensive city in Europe, why Irish whiskey is dearer in Ireland than it is in England, why Irish roads are bad for motorists compared to English roads.

Liam O'Flaherty A Tourist's Guide to Ireland written in ...... 1929

 

[ClubMan]

The high consumer prices are not mainly due to high labour costs.

Would transport costs be a factor, given that we're basically an island nation on the periphery of Europe/the EU.

 

[Dr Strangelove]

@Protocol I don’t disagree that high wages aren’t the main cause.

Ireland has made specific policy choices that keep consumer prices high:

1. High standard rate of VAT at 23%
2. Relatively high tax on fuel
3. VRT and high motor taxation
4. High excise duties on alcohol and extremely high excise duties on cigarettes
5. Minimum unit pricing for alcohol

This explains a large share of (but not a majority) of the price differential with rest of EU.

 

[Purple]

Would transport costs be a factor, given that we're basically an island nation on the periphery of Europe/the EU.

Exactly. We're an island so higher transport costs, an extra link in supply-chains (and so an extra margin), low labour mobility, lower economies of scale generally. All else being equal the fact that we are an island will make us more expensive than the mainland. Britain is also an island but they are significantly bigger.

We, along with Greece, Portugal and Spain, have a significantly high Public Sector premium than the rest of the EU so given that the Hourly Labour Cost graph posted by @Protocol excludes Public Administration that may also be a factor.

 

[T McGibney]

Exactly. We're an island so higher transport costs, an extra link in supply-chains (and so an extra margin), low labour mobility, lower economies of scale generally. All else being equal the fact that we are an island will make us more expensive than the mainland. Britain is also an island but they are significantly bigger.

Just as an addendum to this, for most of the last 20 years Northern Ireland enjoyed significantly lower consumer prices than we did because mass market products tended to be uniformly priced across the UK.

For the same reason, if you visit the extreme north of Scotland, to the Channel Islands, or to a large conurbation like London or Birmingham, most mass market staples will be charged at the same price in each location although the marginal costs of sale in each location will vary significantly.

Nationalistic sentiments aside, there are economic advantages attached to being part of a larger economy rather than as a small autonomous economy

 

[Purple]

Nationalistic sentiments aside, there are economic advantages attached to being part of a larger economy rather than as a small autonomous economy

I agree. That's why we are in the EU. I have no doubt that if we were still part of the UK we would be significantly poorer than we are now. The UK is run as a colony of London with all wealth being sucked into the South East of the country. We'd be like the North of England and what is now Northern Ireland would not benefit from the massive financial transfers it now gets from the UK exchequer in the "please stop killing each other" dividend.

 

[T McGibney]

I agree. That's why we are in the EU.

Nobody views or treats the EU as an economy though. Barely anyone prices a product at a uniform price for sale in Tallaght, Tartu and Timisoara.

 

[Dr Strangelove]

there are economic advantages attached to being part of a larger economy rather than as a small autonomous economy

Ireland is part of a large economy called the euro area

Pricing in places like Zara and H&M is pretty much standardised across the euro area. Clothing and footwear is one of the few areas where Ireland is not very expensive and this is a part of it. VAT treatment on children’s clothing helps.

 

[TomEdison]

Nobody views or treats the EU as an economy though. Barely anyone prices a product at a uniform price for sale in Tallaght, Tartu and Timisoara.

That's because their are not many retailers operating in Tallaght, Tartu and Timisoara.

That doesn't mean that "nobody treats the EU as an economy", though; they certainly do. There's more to an economy than retailing.

 

[T McGibney]

That's because their are not many retailers operating in Tallaght, Tartu and Timisoara.

Apart from the usual suspects like Costa Coffee, you won't find many retailers operating in Stornoway, London, Birmingham and St. Peter Port, but my point in relation to pretty uniform British prices across the archipelago stands pretty well.

That doesn't mean that "nobody treats the EU as an economy", though; they certainly do. There's more to an economy than retailing.

The main influencers of consumer costs within an economy are taxes, laws and regulations. Each EU state has its own individual taxes, laws and regulations, and thus often wildly varying costs for its consumers.

 

[TomEdison]

The main influencers of consumer costs within an economy are taxes, laws and regulations. Each EU state has its own individual taxes, laws and regulations, and thus often wildly varying costs for its consumers.

Each US state has its own taxes, laws and regulations too, in may ways to a greater extent than in the EU, but nobody imagines that means that the US isn't a single integrated economy.

The whole point of the single market was to create a single market by removing barriers to cross-border trade in goods and services. If an Irish retailer can source supplies more cheaply from a wholesalers in Athens than from a wholesaler in Athlone, there are no legal, technical, fiscal or regulatory barriers to stop him doing that, and vice versa. Which is to say, the wholesalers in Athlone and Athens are selling into the same market.

 

[T McGibney]

The whole point of the single market was to create a single market by removing barriers to cross-border trade in goods and services.

That didn't happen as far as consumers are concerned.

Try buying a box of bratwurst sausages from Germany and let us know how you get on.

 

[Dr Strangelove]

Try buying a box of bratwurst sausages from Germany and let us know how you get on.

Available from Amazon.de here for delivery to Ireland!

Amazon.de is a good example of EU-wide price integration. They do not vary the price for products within the EU by destination.

Of course you can’t rent an apartment or get a haircut on Amazon.de. Demand conditions, as well as regulations, are why these services are more expensive in Ireland.

 

[TomEdison]

That didn't happen as far as consumers are concerned.

Try buying a box of bratwurst sausages from Germany and let us know how you get on.

Available from Amazon.de here for delivery to Ireland!

To add to what Dr Strangelove said: There's more involved here that just whether a consumer can buy from a retailer in Athens as readily as from a retailer in Athlone. Perhaps the bigger factor is whether retailers in Ireland can buy from wholesalers/distributors anywhere in the Union (and, of course, they can). Back in they day, somebody could have the agency for a particular product for Ireland and, once he did, he could charge what he liked. No longer; if he's charging rip-off prices businesses can source their supplies elsewhere.

As Dr S. points out, this obviously works for goods better than for services. Many services are traded cross-border, but many (like barbering and home rental) are not. Similarly there are goods that are not really traded cross-border, mainly because of market sentiment. Bratwurst would be a good example; there isn't enough of a market for bratwurst in Ireland for producers/wholesalers to make a commitment to marketing, distribution chains, etc that will service the Irish retial market so, Amazon.de notwithstanding, consumer choice is in practice limited. Or you could have regulatory issues that limit cross-border sales; e.g. different standard plugs on electrical appliances. The Single Market has eliminated most, but not all, of these.

But the overall effect on cost of living of premium prices charged for goods that are price-inelastic precisely because there is low demand for them is, by definition, not great. (Tl;dr: it doesn't matter what bratwurst costs; it's not going to make a huge impact on your household budget.)

 

[T McGibney]

Bratwurst was merely an example and a bad one at that. The point is that for consumers the single market is by and large a mirage.

 

[Dr Strangelove]

Bratwurst was merely an example and a bad one at that. The point is that for consumers the single market is by and large a mirage.

It works quite well for consumer goods with even demand across the EU.

It works less well for services. Part of this is for obvious reasons like there being no one qualified in Bulgaria to give Irish tax advice.

But consumer inertia also plays a part. There are tens of millions of euros in forgone deposit interest that Irish people could access via higher deposit rates elsewhere in the EU with identical depositor protection.

 

[TomEdison]

The point is that for consumers the single market is by and large a mirage.

In the sense that it's not realistic for an Irish customer to go to Milan to buy socks or whatever because they are cheaper there, yes. But of course its equally inconvenient for a Texan to go to Chicago for the purpose.

That doesn't justify the claim that the single market is a mirage, though. Both still benefit from being in what is, in both cases, a single market. The Irish/Texan retailer can source supplies from any producer/wholesaler/distributor in the market. That enables price competition from which the consumer benefits. The consumer doesn't have to source his socks from Milan or Chigago becuse the retailer has an incentive to do that, if there is a price advantage in doing it.

 

[T McGibney]

But consumer inertia also plays a part. There are tens of millions of euros in forgone deposit interest that Irish people could access via higher deposit rates elsewhere in the EU with identical depositor protection.

This inertia is reinforced by ridiculously intrusive laws designed to deter individuals and businesses from banking abroad.

The obligation to report the opening of a "foreign bank account" (the definition of which even encompasses EU-situated accounts) on the annual form 11 tax return is a pertinent example. Anyone of middle age or older will remember the hysteria of the early 2000s when the holding of a "foreign bank account" was officially regarded as an indicator of criminal tax evasion and the holders thereof were forced to prove their innocence or face aggressive Revenue enforcement .

 

[TomEdison]

Tax is one of the areas that does distort the single market, because tax is a national competence and does vary from state to state, which means different tax treatment for cross-border transactions. DIRT may be iniquitously high but it is very administratively convenient for the taxpayer; it's deducted at source and the taxpayer has minimal administrative obligations associated with it. People value that, and it enables Irish providers of deposits to charge a bit more (via a lower interest rate) than the non-Irish institutions with which they compete. Similarly, tax considerations severely limit the ability of the Irish consumer of alcohol, tobacco and other exciseable products to buy from other Member States.