The psychology of the pecking order in coming public sector pay cuts

patslatt

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Some years ago,a survey of a very materialistic and pro-business group of people,Harvard Business School students,asked the following question: Would you be for a pay increase of 5% if everybody else got 10% in your workplace? Most students answered no. This illustrates the importance of the psychology of the pecking order,in which one's relative position in the order is more important than a substantial increase in material reward. In such psychology lies the key to resolving the Irish government's massive financial deficit.

The Irish government budget must cut spending by at least 25% to match sustainable tax revenues.Without such cuts,the national debt burden and rapidly rising interest payments would cripple the economy for a decade or more. Politically,this spending cut may be impossible however,requiring the intervention of the IMF and the ECB to dictate austerity to us.

If Ireland wants to avoid the humiliation of an IMF intervention and keep its economic independence,the government should announce across the board cuts that would leave people's position in the pecking order unchanged. For example,all public sector pay and pensions should be cut 25%,with a somewhat lesser cut in all social welfare payments of say 15%. In the private sector,cuts are occuring through grinding deflation,including bonus cuts, shortened working hours and huge numbers of redundancies. But if this doesn't satisfy the potential militants in the public sector unions who would attempt to shut down essential services in protest, the government could increase income taxes to the punitive rates that prevailed in the 1980s so that we can all be miserable together in the unchanged pecking order.
 


Magellan

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Pat, you're forgetting that people are leveraged up to the gills with mortgage repayments on numerous properties even in the PS. Hitting them with 25% pay cuts may see an increase in defaults in these repayments. This will have knock-on effects in the wider economy.

Pay needs to be managed sure but until we deal with the elephant in the room (high mortgage repayments) can you really see these kinds of cuts being accepted without mass strikes? And how would you suggest we deal with the current mortgage situation?
 

Odyessus

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Pat, you're forgetting that people are leveraged up to the gills with mortgage repayments on numerous properties even in the PS. Hitting them with 25% pay cuts may see an increase in defaults in these repayments. This will have knock-on effects in the wider economy.

Pay needs to be managed sure but until we deal with the elephant in the room (high mortgage repayments) can you really see these kinds of cuts being accepted without mass strikes? And how would you suggest we deal with the current mortgage situation?

But mortgage rates are going down, not up.
 

feargach

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That's no use if your partner just got let go without a redundancy payment, and you've just been whacked by all the various levies. People in that category are in great danger of defaulting if their partner can't score new work.

Especially when you consider that the media agitators are all over RTE and TV3 demanding more and heavier public sector levies in the December budget.

It only takes a few hundred extra defaults to spark off an economic collapse, depending on the timing.
 

patslatt

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That's no use if your partner just got let go without a redundancy payment, and you've just been whacked by all the various levies. People in that category are in great danger of defaulting if their partner can't score new work.

Especially when you consider that the media agitators are all over RTE and TV3 demanding more and heavier public sector levies in the December budget.

It only takes a few hundred extra defaults to spark off an economic collapse, depending on the timing.
It is futile for families to continue paying mortgages they can't afford. The best solution in the case of very deep drops in house prices is for the banks to renegotiate the mortgage payments downwards to a level that partially reflects the reduced values the houses. If a family still can't afford the renegotiated payment,then foreclosure is the best solution for both parties.

With a public sector pay cut of 25%,there would be a knock-on effect on house prices for those ps workers who have a high mortgage burden. If a quarter of the public sector was in this situation,that would be around 80,000 workers and,assuming a spouse or partner shared in the payments,mortgages on less than 80,000 houses would be in danger of default,maybe 60,000. After renegotiation with banks,the number of foreclosures might be a fraction of that figure.

That would put downward pressure on house prices generally but reduction of prices to realistic levels would help to clear excess housing from the market by bringing in new buyers now on the sidelines. At present,there is a standoff between sellers who haven't brought themselves to accept that prices must fall and buyers who refuse to pay prices from the Celtic Tiger property bubble.
 
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patslatt

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Pat, you're forgetting that people are leveraged up to the gills with mortgage repayments on numerous properties even in the PS. Hitting them with 25% pay cuts may see an increase in defaults in these repayments. This will have knock-on effects in the wider economy.

Pay needs to be managed sure but until we deal with the elephant in the room (high mortgage repayments) can you really see these kinds of cuts being accepted without mass strikes? And how would you suggest we deal with the current mortgage situation?
Mass strikes by well paid,comfortably well off workers with jobs for life? Hardly the stuff of Jim Larkin's General Strike in 1913. It's either pay cuts of 25%,layoffs of 25% or a mix of both. Faced with these stark choices,which would be acceptable? The economic alternative is to abandon the euro and inflate away the wage gains with hyperinflation of 20% plus,the Argentina/Brazil scenario.
 

Question R24U

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A bit of red circling would not go amiss.
Eg anyone who applies for unemployment benefit after the 1st May should only get 160
Euro or a 20% reduction. They didn't get the higher rate anyway so the hit will not be noticed over and above the drop from paid work. (once on the dole for a year, everyone should have to reapply so eventually everyone gets on the same rate).
Every vacant public sector job should also be advertised at a rate which is 20% then the predecessor had, eg the deputies of the next dail should only be paid 80 Grand. Lets see who applies. It also means that posts will be filled by ambitious rather t.ibm the next in line.
 

myksav

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Pat, you're forgetting that people are leveraged up to the gills with mortgage repayments on numerous properties even in the PS. Hitting them with 25% pay cuts may see an increase in defaults in these repayments. This will have knock-on effects in the wider economy.

Pay needs to be managed sure but until we deal with the elephant in the room (high mortgage repayments) can you really see these kinds of cuts being accepted without mass strikes? And how would you suggest we deal with the current mortgage situation?
One can always re-negotiate mortgage repayments. Banks are not interested in seeing defaults and a re-negotiated repayment schedule is still repayments. Defaults (on property) are at present a losing proposition as they "lose value" on the market.

I wonder why people don't see this as an option? Shame at a drop in income?
 

InReality

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Your inital point is a good insight. You should have left it at that and we could have had an interesting discussion. Now all people will talk about is your suggested cut.
 

X-ray

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I am sick of this nonsense, a further 25% cut in gov spending just flushes the economy and country down the toilet. Who says that balancing the budget in a short space of time is the way out? There has been no debate on this. It is economic insanity to cause deflation and may be stagflation on purpose. It is fine for Uk and USA to use inflation to lower debt in the medium term, it is sucide for a small country locked in strong currency. If the gov cuts by a further 25% that will be a reduction of over 20 billion euro a year in spending inside two years, we have already had an 8 billion reduction. No country ever has done this before, there is a reason we are heading for a record decrease in GDP this year(over 10%). The last few months in Ireland will be a chapter all of their own in the next big economics book, no country has even anywhere done this badly in so short a period of time.
Is there anyone with a masters in economics out there that can explain the multiplier effect and how impossible it will be to save any retail business if this happens?
Sure we will be have a balanced budget of about 20 billion in two years time. Thats 20 billion in and 20 out, great then what do we do with the wasteland and 25% unemployment and 80 euro a week dole? Riots, crimem drugs, depression, political chaos and division?
What militants in the PS unions? they have swallowed 15-20% reductions in gross income in the last six months without striking. Its hardly France 1968. Sorry the unions did not bite the bullet and take the spot light off your shameful behavior at the top. Cant blame the unions, best pick another target. This concerted attempt to scare people in slave wages is shameful and has already ruined economic growth beyond repair in the medium term. nobody has any confidence in the business world in this country now.

The IMF is not coming in here, we are in the Euro, we have played the game for 30 yrs and tried very hard to save ourselves. If we need the bank in frankfurt to run off a few credit notes it will happen. It will just mean the scu, elite in this country that ran the banks and other businesses will have to take their full medicine. Currently the likes of you are trying to organise some complete scam where the profit and risk takers walk away and the rest of us take a 30-40% hit. Its not happening.
 

Schuhart

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The core point is exactly correct. In any event, the across the board cut can be justified as lower grades are actually relatively more overpaid compared to their private sector equivalents than senior grades, as was discussed on another thread.
One can always re-negotiate mortgage repayments. Banks are not interested in seeing defaults and a re-negotiated repayment schedule is still repayments. Defaults (on property) are at present a losing proposition as they "lose value" on the market.
Indeed, and an advantage of the job security is that any renegotiation is credible - you actually can be pretty confident that you'll still be in that job or a better one in thirty years time.
25% pay cut is not realistic.
I'm afraid that's exactly what it is.
 

Proposition Joe

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What militants in the PS unions? they have swallowed 15-20% reductions in gross income in the last six months without striking.
Can you quantify that 15-20%?

For an average public sector worker on 50k we're talking 6% pension levy, 1.4% income levy (i.e. 2% of 35k), and 4% health levy. That gives a grand total of 11.4%.

For the poor auld clerical officers we're always hearing about, it would be as low as 2% pension levy, 0.7% income levy and 4% heath levy. Giving a total of 6.7%. Which is less than half your lower threshold.
 

patslatt

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A government sector mugged by reality;Drastic cuts unavoidable

I am sick of this nonsense, a further 25% cut in gov spending just flushes the economy and country down the toilet. Who says that balancing the budget in a short space of time is the way out? There has been no debate on this. It is economic insanity to cause deflation and may be stagflation on purpose. It is fine for Uk and USA to use inflation to lower debt in the medium term, it is sucide for a small country locked in strong currency. If the gov cuts by a further 25% that will be a reduction of over 20 billion euro a year in spending inside two years, we have already had an 8 billion reduction. No country ever has done this before, there is a reason we are heading for a record decrease in GDP this year(over 10%). The last few months in Ireland will be a chapter all of their own in the next big economics book, no country has even anywhere done this badly in so short a period of time.
Is there anyone with a masters in economics out there that can explain the multiplier effect and how impossible it will be to save any retail business if this happens?
Sure we will be have a balanced budget of about 20 billion in two years time. Thats 20 billion in and 20 out, great then what do we do with the wasteland and 25% unemployment and 80 euro a week dole? Riots, crimem drugs, depression, political chaos and division?
What militants in the PS unions? they have swallowed 15-20% reductions in gross income in the last six months without striking. Its hardly France 1968. Sorry the unions did not bite the bullet and take the spot light off your shameful behavior at the top. Cant blame the unions, best pick another target. This concerted attempt to scare people in slave wages is shameful and has already ruined economic growth beyond repair in the medium term. nobody has any confidence in the business world in this country now.

The IMF is not coming in here, we are in the Euro, we have played the game for 30 yrs and tried very hard to save ourselves. If we need the bank in frankfurt to run off a few credit notes it will happen. It will just mean the scu, elite in this country that ran the banks and other businesses will have to take their full medicine. Currently the likes of you are trying to organise some complete scam where the profit and risk takers walk away and the rest of us take a 30-40% hit. Its not happening.
"Sick of this nonsense" really means sick of a mugging by reality,the dire arithmetic of the national budget in which 2009 spending is supported by taxes that have sunk to levels early in the decade. Ireland can borrow huge sums for a short while,maybe a year,to cover the deficit. But if drastic cuts aren't made in spending, the concern of the bond market which funds the deficit will grow,driving up interest rates to ruinous junk bond levels of 7% or more in a deflationery environment.

Taxing our way out of this crisis is not an option as further increases in taxes would deflate the economy with little net gain in tax take,while the impact on long term competitiveness of any more income tax increases on high earners would seriously damage economic recovery prospects.

Cutting public sector pay by 25% would take about €5 billions out of spending and cutting social welfare 15% would take about €3 billions more,with a high multiplier effect on economic demand in the latter case. These cuts could be spread over two years and would certainly be deflationery,depressing demand in the overall economy by maybe 2% a year for two years.

But this deflationery effect would be offset by a drop in interest rates.As soon as the international bond market is assured that the government is seriously undertaking those cuts,presumably with the bitter resignation of Irish public sector workers after some futile,sporadic industrial actions,Irish interest rates would drop by about 2% to close to German levels. That 2% would be a huge boost to heavily indebted consumers and government in the Irish economy,reducing interest rates by maybe €5 billion a year over time.

In addition,domestic and international business confidence in the Irish economy would be restored,helping a recovery in business capital spending and inward investment.

The worst case scenario is that the government fails to face down the public sector and make insufficient or no cuts in pay,maybe settling for another increase in the pension levy of 4% next year. Then the rising debt burden would swamp the government finances,with interest costs taking a huge and increasing share of the tax take as junk bond interest rates kicked in on the rolling over of government and private sector bonds.

It would be impossible to recapitalise the banks as interest on the capital for their recapitalisation could not be afforded. Without a bank rescue, the economy could experience a depression in which the economy drops 20%. That would force the government to call on an IMF rescue,which would be conditional on drastic government spending cuts that should have been undertaken in the first place.
 

spraoi

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patslatt
Do you consider that you work in some vital occupation yourself more deserving of a wage?
Actually, notionally I'd like to cut your earnings by say 40% and use that to keep some essential services going?
Is that ok with you?

spraoi
(Teacher and proud of it - hands off!)
 

Schuhart

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patslatt
Do you consider that you work in some vital occupation yourself more deserving of a wage?
Actually, notionally I'd like to cut your earnings by say 40% and use that to keep some essential services going?
Is that ok with you?

spraoi
(Teacher and proud of it - hands off!)
The difference is that currently the Government is borrowing (pro rata) about a third of your salary. That's why we're talking about 25/30% pay cuts. We're not just plucking it out of the sky. To insist on your present salary is to insist on that rate of borrowing continuing, which is simply not possible.

Do you think Patslatt's employer (and I've no idea what his occupation is) could go on forever borrowing one third of their cash flow? Clearly not. So, you see, there is absolutely nothing notional about needing to cut your salary.

I hope you invite your students to look beyond the obvious, and not to hide from uncomfortable truths. Because we really don't need yet another Me Fein generation.
 

patslatt

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patslatt
Do you consider that you work in some vital occupation yourself more deserving of a wage?
Actually, notionally I'd like to cut your earnings by say 40% and use that to keep some essential services going?
Is that ok with you?

spraoi
(Teacher and proud of it - hands off!)
Teachers in Finland make less before heavy Finnish taxes than Irish teachers make after taxes!

That said,I think teaching is a more important profession than the more prestigious professions of law and accountancy.

Your wages can't be paid without reference to the arithmetic of the huge budget deficit. Face it,your employer is is nearly broke and no longer can print money to pay you your accustomed high wages.

As for myself,my business is off about a third.
 


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