ERINI Research Report 1 MEASUREMENT AND BENCHMARKING OF COMPETITIVENESS THE COST OF DOING BUSINESS IN NORTHERN IRELAND

Transcription

1 ERINI Research Report 1 MEASUREMENT AND BENCHMARKING OF COMPETITIVENESS THE COST OF DOING BUSINESS IN NORTHERN IRELAND December 2005

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3 ERINI Research Report 1 MEASUREMENT AND BENCHMARKING OF COMPETITIVENESS THE COST OF DOING BUSINESS IN NORTHERN IRELAND ISBN No: Economic Research Institute of Northern Ireland Limited 2 nd Floor, Floral Buildings, 2-14 East Bridge Street, Belfast, BT1 3NQ Tel: Fax: Website:

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5 CONTENTS Page FOREWORD EXECUTIVE SUMMARY (i) INTRODUCTION 1 Methodology 2 1. LABOUR COSTS 4 Introduction 4 The Northern Ireland Labour Market: An Overview 4 Employment 6 Employment Rates 7 Self-Employment 9 Economic Inactivity 10 Labour Disputes 11 Vacancy Rates in Northern Ireland for 2000 and Vacancy Rates in GB 13 Vacancies: Northern Ireland vs GB 13 Qualifications and Skills within the Workforce 13 Northern Ireland Labour Productivity and Unit Wage Costs 13 Labour Productivity: International Comparisons 15 Industrial Composition and Firm Size 16 Cost of Living 16 Labour Costs for Business 16 Sub-sector Analysis of Northern Ireland Employment Costs as a Percentage of Turnover 18 Regional Variations in Employment Costs 19 Trends in Northern Ireland Earnings Relative to GB 20 Occupational Comparisons 21 Industry Comparisons 22 Are Average Gross Weekly Earnings (AGWE) Competitive in All Areas of Manufacturing? 24 Comparable Evidence: Manufacturing 26 Comparison of Earnings, Northern Ireland and RoI 26 Comparable Evidence: Tradeable Service Labour Costs in Northern Ireland, GB and RoI 26 NI Earnings Relative to Other EU Countries 28 Summary of Statistical Evidence on Labour Costs 29 Conclusions and Policy Recommendations ENERGY COSTS 33 Introduction 33 Energy Costs: Electricity 33 NI Electricity Prices relative to GB and RoI 34 Price Comparisons at the Small, Medium and Large User Level 37 Small Industrial Users 38 Medium-Sized Users 38 Large Users 40

6 Contents Energy Intensive Sub-sectors 41 Historical Trends in EU Prices 41 Northern Ireland Gas Prices 42 Historical Trends in Gas Prices within the EU, UK, RoI and Northern Ireland 43 Gas Customer Groupings 45 Conclusions and Recommendations 46 Policy Issues 47 Legacy Contracts INSURANCE COSTS 49 Introduction 49 Influences on the Cost of Insurance Costs 49 Current Trends in Insurance Premiums 50 Insurance Premiums by Sector 50 Insurance Premiums and Firm Size 51 Average Premium Cost by Premium Type 51 Comparisons with other Regions 52 International Comparisons 53 RoI Comparison 54 Conclusions: Insurance Costs 54 Conclusions PROPERTY COSTS 57 Introduction 57 NI s Property Costs 57 Valuations and Lands Office: Office Market, Annual Report Northern Ireland vs GB Industrial Rent and Capital Values 58 Northern Ireland vs RoI: Office and Industrial Rental Costs 60 International Property Costs 61 Property Costs as a Percentage of Turnover 62 Property Costs: A Competitive Advantage? 63 Stamp Duty 63 Industrial De-rating 63 Business Rates in other Regions 64 RoI Business Rates Relative to Northern Ireland 65 Better Property Management 67 Property Set-up Costs 68 Conclusions ENVIRONMENTAL COSTS 70 Introduction 70 Environmental Costs and their Impact upon Competitiveness 70 Environmental Costs: A Breakdown 71 Waste Costs 71 Landfill Costs: Northern Ireland, England and Wales and RoI 72 Landfill: International Comparisons 74 Landfill Infrastructure 75 EC Directive on Waste Electrical and Electronic Equipment: WEEE 76 Water Costs 76 Types of Industrial Water Use 76 Northern Ireland Industrial Water Charges (Current) 76 UK Water Tariffs 77

7 Contents Water Charges: Northern Ireland vs RoI 78 Sewerage Charges 79 Trade Effluent Charges 79 Reform of the Water Service in Northern Ireland 79 Water Charging Models 80 Conclusions TRANSPORT COSTS 85 Introduction 85 Factors Influencing Transport Costs 85 Fuel Prices, Taxes and Geography 86 Infrastructure 89 Northern Ireland Ports 90 Road System 91 Market Size 92 Competition and Regulation 93 Conclusions FINANCE COSTS 95 Introduction 95 Accessing Finance 95 Informal Investors 96 Venture Capital 97 Business Banking Charges in Northern Ireland 97 Supply of Banking Services: The Northern Ireland and GB Market 97 Market Structure: Northern Ireland Clearing Banks 98 Supply of Banking Services 98 The Demand for Banking Services to SMEs 99 Commission s Findings on Barriers to Entry in the Banking Market 100 Commission s Conclusions on Monopoly Behaviour 101 Office of Fair Trading 102 Banking Charges: Northern Ireland 102 Comparison of Overall Pricing in the GB and Northern Ireland Banking Sector 102 Interest Income Margins for Loans 103 Conclusions COMPLIANCE COSTS 105 Introduction 105 What are Compliance Costs? 105 Difficulties with accurately assessing Compliance Costs 107 Survey Results 108 Expectations for the Future Compliance Burden 108 Helping Firms with Compliance Costs/Burden 110 Conclusions TELECOMMUNICATIONS COSTS 112 Introduction 112 The Significance of Telecommunications Costs to Business 112 International Comparisons 112 Evidence from OECD 113 Broadband 114

8 Contents Cost Reductions 115 Conclusions CONCLUSIONS NI Costs Relative to GB 116 Cost Differentials 116 NI Costs Relative to RoI 117 NI Costs Relative to other EU Countries 118 NI Costs Relative to other Regions: A Summary 119 How Costs Differ for Manufacturing vs Tradeable Services and for Small vs Large Firms 120 Environmental Costs 121 Expectations for Future Costs 121 Compliance Costs 122 Summary 123 ANNEXES 124 Annex 1: ABI Purchases Data 2002 and Annex Annex Annex Annex Annex Annex 7: Restructuring Generator Contracts 139 Annex Annex Annex Annex REFERENCES 154

9 FOREWORD Over the past decade countries, regions and even cities have become concerned about their ability to compete in what is increasingly a global market place. As a result the search for means of improving competitiveness is now at the heart of economic development strategy in Northern Ireland. One of the most important dimensions of competitiveness is, of course, how the region compares with other areas in terms of the costs of doing business. Some costs such as transport are closely related to geography while others like local taxes and charges depend on the financial requirements for public services. In order to get a fuller picture of local cost conditions it is necessary not only to look at individual costs but also to understand how well the underlying markets that produce them work. In the spring of 2004 the then Minister, Ian Pearson, asked the newly formed Economic Research Institute of Northern Ireland (ERINI) to examine how the main business costs in Northern Ireland compared with those in Great Britain, the Republic of Ireland and in Europe and to analyse any significant differences. This report is the outcome of that study. The report sheds new light on a wide range of costs facing business in Northern Ireland and the structure of local markets that give rise to these costs. As a result it combines both facts and figures about business costs with insights on why costs might be different in Northern Ireland compared to other areas with which the region is in competition. The report is therefore primarily a contribution to building the evidence base for supporting the development of economic strategy in Northern Ireland. It does not make policy recommendations at this stage but it is a rich source of information upon which those responsible for making policy decisions can draw. VICTOR HEWITT Director

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11 EXECUTIVE SUMMARY In May 2004, the Economic Research Institute of Northern Ireland (ERINI) was commissioned to undertake research on the competitive position of the local economy. The terms of reference required the research to be undertaken in two stages. In stage (1) the Institute was to carry out an in-depth study of the main costs facing Northern Ireland s manufacturing and tradeable service companies and analyse the reasons for any price differentials found between local costs and those in Great Britain, the Republic of Ireland or Europe. In addition, a postal survey was to be undertaken in order to establish more detailed information with regard to company costs. Stage (2) of the study involved a Scoping Study, to assess international competitiveness indices and identify appropriate competitiveness indicators that could be used to assess Northern Ireland s competitive position over time. In addition, the results of the postal survey were to be presented at Stage (2). The survey of local businesses was considered an important element of this study and ERINI was, therefore, disappointed that the response to the postal survey was poor, with approximately 90 companies out of 500 returning their questionnaires. Unfortunately ERINI was restricted from using the survey data to draw any firm conclusions because the sample response rate was not statistically representative. However, in those cost areas where the sources of data were scarce (such as compliance and finance costs) the survey was used to give a rough indication of these costs as a percentage of turnover. To supplement the lack of survey responses ERINI carried out a number of interviews with local manufacturing and tradeable service companies to get a better understanding of the cost issues. This paper sets out the findings from Phase (1) of the study which specifically looked at the main costs areas affecting local manufacturers and providers of tradeable services. The costs studied were: labour; energy; insurance; property; transport; environmental (namely waste disposal and water); finance and compliance. The overall findings from this research indicate that on balance business costs in NI are currently relatively competitive when compared to GB and the RoI. The principle reason for this competitive advantage lies in cheaper labour costs and cheaper property costs, which together make up approximately 19.3% of company turnover (on average). While some cost elements such as energy and insurance costs are higher in Northern Ireland relative to GB, these uncompetitive costs together make up less than 4 per cent of turnover on average and therefore are less significant. ERINI found that on average finance costs, environmental costs, compliance costs and telecommunications costs were similar between Northern Ireland and GB. For transport costs ERINI found that freight costs in Northern Ireland are higher relative to those in GB and fuel prices are also higher. However, Northern Ireland s unique position of bordering the Eurozone has kept transport costs lower than would otherwise be the case for some Northern Ireland businesses and, in addition, a high density of transport companies in Northern Ireland has resulted in downward pressure on prices being maintained through competition. All other costs analysed in the report are broadly similar between NI and GB. Although ERINI did not analyse the cost of Purchases as part of this research, it should be noted that the cost of (i)

12 Executive Summary Purchases as a percentage of turnover, were found to be broadly similar for NI and the UK for both manufacturing and tradeable service sectors 1. However, despite the appearance of a relatively competitive cost base for business in 2004, it should be noted that all regions are subject to constant change in terms of their cost competitiveness. Indeed, a number of Northern Ireland s business costs are expected to rise in the near future such as energy and utility charges and the cost of transport and property. Some of these increases are driven by movements in international markets (for example energy) and would leave Northern Ireland s relative cost position unchanged, while others reflect, in part, changes in local policies. In terms of the importance of each cost (as a percentage of turnover), while this will vary depending upon the sector, on average the following was found: Cost Cost as a % of Turnover Purchases Labour Net Capital Expenditure 4.17 Property* 2.95 Energy 1 to 2 Transport 2.00 Insurance 1.70 Compliance* 1.27 Environmental Costs (including Water) 0.50 Telecommunications Finance Possibly up to 13% for call centres. Insignificant for Manufacturers. Insignificant *Estimates of these costs as a percentage of company turnover have been derived using data from the ERINI postal survey (90 respondents). A summary of the main findings for each cost area is shown below: Main Findings Labour Costs: Northern Ireland has a competitive advantage over other UK regions with regard to labour costs (and this advantage remains, albeit reduced, 1 For a summary of the relative importance of Purchases and Employment costs as a percentage of turnover for various industry sectors, see Annex 1. (ii)

13 Executive Summary when data are adjusted for London and the South East). Thus for particular sectors where labour costs make up the largest component of their business costs, Northern Ireland companies should other things being equal have an advantage. Data for 2004 reveals that NI no longer has a competitive advantage with regard to manufacturing labour costs when compared to the RoI, but the advantage is retained for the majority of services. Electricity Costs: Using a mid point within the 2004 price ranges available for Small, Medium and Large electricity users in Northern Ireland and taking a rank of 1 to indicate the cheapest price, the following observations were made: - Northern Ireland s Small user electricity prices ranked 12 th out of 15 European countries compared (i.e. NI was the third highest) Medium users ranked 8 th out of 14 regions compared and Large Users in Northern Ireland ranked 11 th out of 13 comparator regions. Natural Gas Costs: Average non-commercial gas prices for Northern Ireland (excluding taxes) ranked 8 th out of 12 European countries in January 2004 (where 1 represents the cheapest country for gas). In both 2003 and 2004 Northern Ireland had less competitive prices than the UK as whole (the latter ranked second for average business gas prices). The RoI also enjoys marginally cheaper gas prices, ranking 4 th and 6 th for the respective years examined. Insurance Costs: Industry interviews have confirmed that Northern Ireland s business insurance costs are higher than GB counterparts but lower than counterparts in the RoI. Post 2001 hikes in premiums were experienced across the globe and were not restricted to Northern Ireland. Premiums locally have begun to fall and industry experts expect this fall to continue over the next couple of years. Nevertheless, there is an expectation that companies must work actively to reduce their risk and, hence, their premiums. Property Costs: Both capital and rental per m2 are lower in Northern Ireland relative to UK and RoI average property costs. In particular for office accommodation NI appears to have a competitive advantage but industrial property costs are cheaper in the North of England, Wales and Scotland. The introduction of industrial de-rating will undoubtedly have an effect on manufacturing costs, but with regard to cost competitiveness relative to GB and RoI, this initiative is intended to bring NI into line with the UK and other EU regions. Because of capitalisation effects cost increases in this area should be partly offset by lower rental and capital costs of property. Transport Costs: Freight costs in Northern Ireland are higher relative to those in GB and fuel prices are also higher. While peripheral regions are expected to exhibit higher transport costs, Northern Ireland s unique position of bordering the Eurozone has kept transport costs lower than would otherwise be the case for some Northern Ireland businesses. Evidence was found of a high density of transport companies in Northern Ireland (many of which enjoy lower labour (iii)

14 Executive Summary costs relative to GB), this would suggest that prices are to some extent kept down through competition. Finance Costs: Overall it was found that finance charges are not a significant cost. In 2002 the Competition Commission found that prices for financial transactions in Northern Ireland are not excessively high. However, ERINI note that Annual Charges based on Published Money Transmission Prices were found to be on average higher in NI relative to other UK regions. Research by the Competition Commission also revealed that there were other adverse effects on choice and the level of information available to SMEs. Any future investigation into the personal banking market in NI (stemming from a recently issued super-complaint regarding personal finance charges), may have knockon effects for local business banking market. Nevertheless, ERINI concludes that there is a need for businesses to do more themselves to ensure they obtain the best finance deal possible. Environmental Costs: Environmental costs are rising in Northern Ireland and in other EU regions as most of the regulatory changes stem from EU Directives that are applied across the board. Environmental costs are estimated to represent less than one per cent of turnover and thus are in general unlikely to seriously impact upon a firm s competitive position. Compliance Costs: ERINI s research to date has shown that Northern Ireland companies face roughly the same level of compliance relative to GB counterparts and the cost, as a proportion of turnover, is small (1.27%). However, consideration must also be given to the fact that such costs are more burdensome to SMEs and these companies make up a significant proportion of Northern Ireland s economic activity. Undoubtedly business will face further compliance legislation during the next number of years and therefore ensuring effective compliance at least cost should remain a government objective. Telecommunications Costs: Northern Ireland is not at a disadvantage with regard to telecommunications costs or infrastructure relative to GB. Updated infrastructure and a competitive market in this area can only bring about lower future costs. However, there is a responsibility on companies to utilise available technology and infrastructure. In addition, it is important that costs are driven down by supplier switching when appropriate. The overall position for Northern Ireland as set out in this report is that the competitive position of the region currently lies in lower labour and property costs. Although less significant costs such as energy and insurance costs may be higher, in most respects, costs as a general rule, are broadly similar. (iv)

15 INTRODUCTION Competitiveness is now the watchword of economic development across the world. How to improve the ability of firms and countries to grow profitably in the face of competition in an open market is the focus of every respectable economic strategy or plan. In an open market there is no future for a company that cannot create and sustain a competitive advantage and there is consequently an intense interest in discerning what the elements of such an advantage may be. The answer will differ depending on the product or service considered so that access to raw materials, skilled labour and management, abundant power, adequate capital and good location may all play a role in securing an advantage over competitors. Common to all these requirements and many others, however, is the ability to access them at reasonable cost if they are to be regarded as advantages rather than impediments to competition. Of overwhelming concern to any firm that does not command monopoly power, therefore, is the need to secure a competitive cost base for its operations. The purpose of this report is to examine how Northern Ireland compares as a place to do business in terms of its main business costs relative to competitive locations in Great Britain, the Republic of Ireland and the rest of Europe. This is both important and interesting because Northern Ireland is in a state of transition from a deeply troubled and violent past, conditions which are anathema to business, to a hopefully more stable future. But with normality there are also moves to regularise the environment of government support that the local economy has enjoyed as an offset to the disadvantage of conflict. In particular the regime of local taxes and charges is changing in a manner that is bound to place additional financial burdens on business. The ending of industrial de-rating, for example, will impose an additional 60 million per annum (at current prices) onto business costs and the reform of water charging may add upwards of another 100 million each year with the prospect of real growth in both. Together these new taxes are broadly equivalent to what the local economic development agencies would have traditionally spent each year on selective financial assistance and other measures for industry. In this new climate it is more important than ever for both business and policy makers to seek an accurate estimate of where Northern Ireland s cost base sits relative to other competitors. In addition, it is important to understand why cost differentials have arisen or are likely to arise in the future relative to other regions. Where costs are higher due to market imperfections, for example, there may be a case for government to intervene to correct the situation. On the other hand if cost differentials are a natural consequence of the out workings of markets and different endowments and attributes of participants and their locations then that needs to be understood as a parameter within which businesses have to plan for in their decision making processes. This paper aims to clarify the following: What are the significant costs (in ranked order) associated with doing business in Northern Ireland and how do they differ for manufacturing vs tradeable services and for small vs large firms? 1

16 Introduction What is Northern Ireland s costs position relative to the rest of the UK, the Republic of Ireland, and the EU? What are the reasons for any cost differentials found? Methodology This paper assesses the main business costs facing both manufacturers and tradeable service providers in Northern Ireland and compares these costs, where possible, to other UK regions, the RoI and Europe. Looking at business costs relative to Great Britain and the Republic of Ireland is important because of the significance of these markets in terms of Northern Ireland s manufacturing sales and, in addition, both countries are keen competitors of Northern Ireland when it comes to attracting foreign direct investment. Cost data for Eurozone countries was also included where available as Northern Ireland s main export markets (Great Britain {46.1 per cent of sales} and Rest of World {15 per cent of sales}) are also served by countries from the Eurozone. EU accession countries provide an abundant supply of cheap labour combined with cheaper transport costs for Eurozone sales, thus ERINI has also included cost data for these countries when available. Finally, the effects of globalisation upon small open economies such as Northern Ireland means that costs in more distant economies such as the US and Canada have become more significant than ever before and therefore any directly comparable data has been incorporated where possible. Annex 2 sets out for each cost the various comparator regions for which data was available. As the cost of operating a business will vary according to the type of business and according to company size, it was considered necessary to supplement the desk research with some primary research in the form of survey work and interviews. Unfortunately the number of responses to the ERINI survey was inadequate and, although more in-depth company interviews were carried out to supplement this lack of survey evidence, definitive conclusions could not be drawn from the primary research. The lack of survey respondents therefore had knock-on effects for differentiating the impact of particular costs on large as opposed to small companies and manufacturing compared to tradeable service companies, thus any conclusions on how costs differ for these groups are generally drawn from information sources beyond the ERINI survey. The report is structured as follows. Chapters 1 to 10 explore the various costs facing businesses and assess their relative importance in relation to company turnover. In addition, the chapters also consider reasons for price differentials and/or expected cost changes (for example, where government regulations and reform affect present or future costs). Some areas, such as labour costs, cover relatively well-trodden ground and we have not sought to rehearse all of the arguments again. In the case of energy costs the underlying issues are examined in some depth (though the details are confined to the annexes) both because they are complex and because of the interest this topic provokes. Where radical changes are also in prospect as in water charges this also merits more than proportionate examination. Each chapter concludes by considering the lessons learned and the scope for policy interventions 2

17 Introduction by government where there is evidence that these might be justified. We have also indicated where appropriate those areas or issues which would benefit from further research. 3

18 1. LABOUR COSTS Introduction The ABI results for 2003 show that on average employment costs in Northern Ireland account for approximately 16.4% of company turnover 2. An earnings differential of 14.5% 3 between local wage levels and the UK average might at first glance suggest that Northern Ireland companies have a significant competitive advantage in this area. However, to get a better understanding of wage levels locally relative to the rest of the UK, it is important to take account of a number of important influences on earnings (such as the skewing effect caused by London and the South East; sectoral differences; regional productivity levels and unit wage costs) before definitive conclusions can be drawn. This chapter looks at the structure of the local labour market and discusses the major influences on local wage levels, namely: labour supply and demand conditions, productivity levels, skills and the regional cost of living. A detailed statistical analysis of the earnings differential by both occupation and sector is presented. Finally the chapter concludes with a summary of the research findings, policy implications and recommendations for future research. The Northern Ireland Labour Market: An Overview As noted earlier private sector wages in Northern Ireland are determined by a variety of mechanisms but some appreciation of the basic structure of the labour market is required to understand the background within which these forces operate. Table 1.1 below sets out a snapshot of the structure of the labour market for those aged 16 and over as of December-February 2005 based on Labour Force Survey data. A graphical representation is shown in Figure 1.1. In broad terms, if employment is taken to be a reflection of the demand for labour then this has increased significantly in Northern Ireland over the past decade with about 100,000 more people in employment now compared to the early 1990s. On the supply side over the same period the adult population has risen by around 10 per cent. Unemployment on the other hand has fallen significantly - approximately 55 per cent between 1992 and 2005 to stand at 37,000. Although these are encouraging figures in many respects they have to be qualified by the other major feature of the labour market economic inactivity. At Dec-Feb 2005 there were 533,000 economically inactive adults aged 16 and over in Northern Ireland of whom about 292,000 were of working age. 2 However this varies significantly between sectors as demonstrated in Table This differential is for all Full-time employees. 4

19 Labour Costs Table 1.1 The Northern Ireland Labour Market as at Dec- Feb 2005 ( 000s) Population 16+ Men 631 Women 678 Total 1,309 In Employment Men 403 Not In Employment Men 229 Women 337 Women 341 Total 740 Total 569 Of which: Full-time Employees Of which: Men 369 Unemployed: Men 26 Women 200 Women 12 Total 569 Total 37 Part-time Men 32 Economically Men 203 Inactive Women 137 Women 329 Total 169 Total 532 Of which: Seeking Work Men 13 Women 24 Total 37 Self-Employed Men 98 In full-time Men 39 Education Women 20 Women 37 Total 118 Total 76 Source: Labour Force Survey

20 Labour Costs Figure 1.1 Northern Ireland's Labour Market Structure Dec-Feb 2005 (All persons aged 16 and over) 40% 1% 3% 56% Employed Unemployed Inactive Other Note: Other includes Government training and employment schemes and unpaid family workers. Source: DETI NI Labour Market Statistics, April 2005 We now examine each of these elements of the labour market to get a fuller picture before turning to the issue of wages and wage costs. Employment Northern Ireland s Quarterly Employment Survey (QES) reported that in December 2004 the number of employee jobs in Northern Ireland was at an all time high (692,650). Northern Ireland s working age employment rate is estimated at 68.5 per cent the lowest of all the UK regions. The QES (2005) also indicated that Employee Jobs in December 2004 were split as follows (Table 1.2): 12.7 per cent are employed in Manufacturing and 79.3 per cent are employed in the Services sector (with around 40 per cent of those employed in the Public Sector) and only 5.2 per cent are employed in Construction per cent of all employee jobs are full-time and 34.5 per cent are part-time. The majority of part-time jobs are in the Services sector and are predominantly held by women. (In Spring 2003, 9.1 per cent of part-time females said they could not find a full-time job (National Statistics, 2004, Table 5.9)). 6

21 Labour Costs Table 1.2 Northern Ireland Employee Jobs (December 2004) Unadjusted Males Females Total Since Last Year Manufacturing: 67,450 20,490 87, % Full time % (97) (80.6) (93.2) Part-time % (3.0) (19.4) (6.8) Construction: 32,690 3,710 36, % Full time % (95.2) (64) (92) Part-time % (4.8) (36) (8) Services: 217, , , % Full time % (77.3) (49) (60.2) Part-time % (22.6) (51) (39.8) Other*: 16,820 2,360 19, % Full time % (42.0) (40.6) (41.8) Part-time % (58) (59.4) (58.2) TOTAL: 334, , , % Full time % (81.2) (50.8) (65.5) Part-time % (18.8) (49.2) (34.4) *Covers Industry Sections A, B, C, & E, which are not seasonally adjusted. Source: DETI, Quarterly Employment Survey, 2005, Employment Rates In terms of employment rates (percentage of those of working age in employment), however, the performance of Northern Ireland has been less satisfactory. Employment rates for the UK regions are shown in Table

22 Labour Costs Table 1.3 Employment Rates by Region Dec-Feb 2005 South West 78.9 South East 78.8 East 78.7 East Midlands 76.5 Scotland 75.3 Yorkshire / Humberside 75.2 West Midlands 75 North West 73.6 Wales 72.4 North East 70.8 London 69.9 Northern Ireland 68.5 UK 75 Source: Labour Force Survey (2004) A further indicator of labour demand in Northern Ireland relative to other UK regions is provided by the Jobs Density Indicator (JDI) which is defined as the ratio of the total number of jobs in an area to the resident population of working age in that area. Job in this sense is wider than the employee job definition (though this is the largest component) and includes agricultural employees, the self-employed, trainees on Government schemes and the armed forces. Because the data on each class of employment is drawn from different sources and at slightly different times, the overall precision of this indicator is lower though it still contributes to the broad picture of labour market demand in an area. JDIs for the UK regions over the period are shown in Table 1.4. As can be seen on this indicator Northern Ireland is the third worst UK region with roughly three jobs for every four people of working age. 8

23 Labour Costs Table 1.4 Job Density Indicators for UK Regions, Region London South East South West North West East North East Yorkshire / Humberside East Midlands West Midlands Scotland Wales Northern Ireland UK Source: Labour Market Bulletin 18, November 2004, DEL Self-Employment Based on Labour Force Survey data for Dec-Feb 2005 there were an estimated 118,000 self-employed in Northern Ireland, an increase of 26.5 per cent since In Spring 2004, Northern Ireland had the highest self-employment rate 4 (15.5%) in the UK, with the North East having the lowest (9%) 5. However, unlike the growth of employees which was similar overall the growth of self-employment has been volatile 4 Defined as percentage of all persons of 16 and over who are in work and self-employed. 5 Source: Labour Force Survey

24 Labour Costs with falls in the early, mid and late 1990s followed by steep increases in the early 2000s. Economic Inactivity Focusing on employment (employees and the self-employed) and unemployment can give a distorted picture of the labour market because attention is drawn only to the economically active which is the definition given to the sum of these components. The third major group to be considered is the economically inactive, that is, those who are not working and who are not actively seeking work and available to work. Labour Force Survey data for Dec-Feb 2005 suggests that there were about 533,000 economically inactive people aged 16 and above in Northern Ireland at that point in time. Of those about 292,000 were of working age amounting to some 28 per cent of all persons of working age. Some key features of this variable are: a) Northern Ireland has the highest inactivity rate in the UK by a wide margin. In Dec-Feb 2005 the relativities for the four home countries were: Table 1.5 Inactivity Rates UK Dec-Feb 2005 England 20.9% Scotland 20.1% Wales 24.2% Northern Ireland 27.9% Source: LFS (2005) b) Over a long period of time the inactivity rate in Northern Ireland has remained quite stable with a variation of around three percentage points. c) While the overall inactivity rate has been stable its components have varied significantly over time. In particular the number of economically inactive due to long-term sickness or disability went up by a factor of more than 3 over the decade and some 10% of the population of working age in Northern Ireland is now accounted for by this group. In terms of inactive persons who do not want a job 33 per cent are classified as long-term sick, 27 per cent care for family/home and 40% are students or retired persons. 10

25 Labour Costs d) The majority of inactive people (45%) are in the retirement age category, however, over one-third are over the age of 25 and under retirement age, see Figure 1.2 below. Figure 1.2 Northern Ireland Economic Inactivity by Age, Dec-Feb % 7% 11% 21% 16% (m) & (f) 65+(m) & 60+(f) Source: NI Labour Force Survey 2005 Labour Disputes In 2002, Northern Ireland had the highest level of trade union membership (40.8 per cent of all employees) compared to England (27.5%), Wales (38.9%) and Scotland (33.8%). In addition, it had the lowest number of days lost due to labour disputes (34 days lost per 1,000 employees). This compares to England, Wales and Scotland who lost 54, 74 and 54 days respectively per 1,000 employees (National Statistics, 2004, Tables 5.13 and 5.15). However, in Northern Ireland, while the private sector s Days Lost figures for 2003 may be consistent with the previous year, the 2003 NIPSA strike will have had a detrimental impact upon the public sector figures. Vacancy Rates in Northern Ireland for 2000 and 2002 The vacancy rate is the ratio of vacancies as a percentage of all job openings (both filled and unfilled) in the labour market. If the labour market is becoming tight, more employers will have difficulty filling vacancies and the vacancy rate will rise. The Northern Ireland Skills Monitoring Survey (DEL, 2002) shows that for Northern Ireland this does not appear to be the case. 11

26 Labour Costs The most recent survey compares vacancy rates from 2000 and Overall, vacancy rates have fallen with private sector employers reporting a vacancy rate of 2.7 per cent in 2002 compared to 4.5 per cent vacancy rate in In the category of Difficult to Fill Vacancies, a vacancy rate of 1.6 per cent was recorded in 2002 compared to a rate of 2.9 per cent in For External Skill Shortages there was a vacancy rate of 1.2 per cent in 2000 and this fell to 0.3 per cent in The highest vacancy rate in the Difficult to Fill Vacancies was Hotels & Restaurants in 2000 with a vacancy rate of 6.5 per cent, dropping to 2.3 per cent in The sector with the lowest vacancy rate in this category was the Utilities sector, with a vacancy rate of 0.1 per cent for both years examined (see Figure 1.3 below). In the External Skill Shortages category, the sector with the highest vacancy rate in 2002 was Business Services at 0.4 per cent (this had fallen from 2.2 per cent in 2000). Again the Utilities sector had the lowest external skill shortages of 0.1 per cent in Figure 1.3 Difficult to fill Vacancies % Rate Difficult to fill Vacancies 2000 Difficult to fill Vacancies 2002 All Private Sector Employees Mining & Quarrying Manufacturing Utilities Construction Wholesale & Retail Hotels & Restaurants Transport & Communications Sector Financial Services Business Services Other Services Source: The Northern Ireland Skills Monitoring Survey 2002, Department of Employment and Learning 12

27 Labour Costs Vacancy Rates in GB The Vacancy Survey (ONS, 2003) conducted by the ONS displays the data in a different format, although comparative trends can be found in the data. The survey shows that overall job vacancies for across England, Wales and Scotland stand at around 600,000 and that there has been little change in the number of vacancies over the past couple of years. When the concentration of vacancies is expressed as ratios per thousand employees, it is observed that the highest concentration was in the Hotels and Restaurants sector, as well as Transport, Storage and Communications. In GB, the Education sector is where the most significant increase in job vacancies occurred. Vacancies: Northern Ireland vs GB Using the DEL Skills Survey and the ONS Vacancy Survey to compare Northern Ireland and GB vacancy rates, it is apparent that vacancy rates have significantly dropped in Northern Ireland over the past two years, but that vacancy rates in Britain have not seen a similar decrease. Both Northern Ireland and Britain have the highest vacancy rate in the Hotels & Restaurants Sector. Qualifications and Skills within the Workforce In autumn 2004, Northern Ireland had the highest percentage of economically active adults with no qualifications in the UK (17.5% in NI vs 10% for the UK as a whole). (DTI, 2005). This indicator may also reveal something about Northern Ireland s brain drain problem 6 and its inability to attract mobile employees with certain qualifications. Undoubtedly Northern Ireland does not possess the same degree of economic pull in terms of attracting well qualified people that London or the South East appears to have. Northern Ireland Labour Productivity and Unit Wage Costs As well as demand and supply conditions in the labour market, productivity of the labour force can also have a significant impact upon wages. Recent figures released by the ONS (Dec 2004) show that for 2003 the region with the lowest productivity was Northern Ireland, with indices of 89.6 for GVA per filled job and 84.3 for GVA per hour worked, where the UK average is indexed as 100. Thus Gross Value Added (GVA) per hour worked in Northern Ireland in 2003 was 15.7 per cent lower than the UK average 7 (see Figure 1.4) 6 The brain drain problem refers to the trend in Northern Ireland for many graduates from local universities to seek employment in GB and for Northern Ireland graduates from universities in GB and the RoI not to return. 7 N.B.: GVA regional data at the sectoral level has been removed as the 2001 data was too dated. 13

28 Labour Costs 120 Figure 1.4 Gross Value Added per Hour Worked (2003) UK NE N Y& E W E L SE S EN W S NI Source: DTI 2005 However, it should be noted that over the period the NI economy experienced nominal growth of +28%. While total GVA, before allowing for inflation, has been increasing in all regions over the year to 2003, the regions with the second highest recorded growth were NI and Wales 8, which both grew at a rate of 6 per cent. A basic calculation of manufacturing unit wage costs (see Annex 3) also suggests that NI s unit wage costs are currently lower than the UK equivalent (0.51 in NI and 0.54 in the UK 9 ). In the UK manufacturing unit wage costs saw dramatic falls in 2003 but have remained unchanged between 2003 and The Bank of England (2005) reports that as a result of strong labour productivity growth, unit wage costs for the UK were almost flat in the year to 2004 Q3. High levels of productivity growth at the local level 11 have undoubtedly influenced Northern Ireland s unit wage costs, but for a more accurate depiction of unit wage costs over time, ERINI recommends that these statistics are gathered formally and published on an annual basis by the DETI. 8 The East Midlands recorded the greatest nominal GVA growth at a rate of 6.3%. 9 Measured in sterling. 10 See: Bank of England (2005) Chapter 4 Costs and Prices 11 N.B. Manufacturing productivity has shown an upward trend in recent years due to manufacturing output remaining fairly steady despite the fall in manufacturing employment. 14

29 Labour Costs Labour Productivity: International Comparisons The World Competitiveness Yearbook 2003 ranks the output per employee per year in US dollars for a number of countries. Using the GDP measure of output the US ranks first, the RoI ranks second and the UK ranks eighth out of sixteen countries. However, using the GNP measure, (which excludes multinational income flows) the RoI ranking falls to ninth (See Figure 1.5 below). Thus in their Labour Market Report FAS (2003) note that caution is needed in making comparisons between Ireland and other EU countries using GDP-based indicators as the strong performance of technology-intensive sectors and the gap between GDP and GNP means that Irish productivity figures are somewhat flattering. It should be noted, however, that our strong showing on productivity has been heavily influenced by a few exceptional industrial sectors, notably chemicals and electronics, which account for only a small proportion of manufacturing employment. (FAS, 2003) Figure 1.5 Output per Employee per Annum 2003 (US$) US Ireland Denmark Japan France Sweden Finland UK Italy Ireland (GNP) Netherlands Germany N.Ireland Spain New Zealand Korea Hungary Poland Source: IMD World Competitiveness Yearbook 2003 /FAS and National Competitiveness Council: Annual Competitiveness Report 2003/ NI data taken from ONS: Regional Gross Value Added Dec 2004http:// page 9 The report notes that where GDP and GNP measures tend to coincide in most countries, in Ireland annual growth in GDP was on average about 1.25 per cent faster than GNP during the late 1990s. When data for Northern Ireland is inserted, the region ranks 13 th out of the 17 comparator countries. 15

30 Labour Costs Industrial Composition and Firm Size Industrial composition can also impact upon wages in the local market. Regions with a large proportion of high-profit industries tend to exhibit high wages. Northern Ireland s manufacturing composition is still dominated by traditional sectors, with Food Drink and Tobacco 12 accounting for approximately 21% of manufacturing employment. However, the second largest manufacturing sub-sector is currently Transport Equipment (a low profit sector) which makes up 11.6% of manufacturing employment. Other high-profit sectors such as Chemical products, Paper and printing and Electrical and Optical are not dominant within Northern Ireland s industrial composition. In terms of company size, Northern Ireland has a high proportion of small businesses and according to the traditional view, the inefficient scale of operations in small firms results in lower productivity levels and hence lower wages. However, while small firms (less than 20 employees) account for approximately 95 per cent of all firms, they account for only 22.4 per cent of employees, with nearly 60% of employees working for large businesses (100+ employees) 13. Thus it can be concluded that lower wages in NI can only partially be attributed to the large number of small firms in the local economy - as the majority of employees work for large businesses. Cost of Living Local wage levels are also influenced by the regional cost of living. Recent ONS research on regional consumer price levels (ONS, 2004a) reveals that when using national weights, the average price level in Northern Ireland is 4.2 per cent lower than the national average. Results for the 14 Regional Price Index groups of expenditure shows that the highest variation comes from housing costs, with prices in London and the South East almost double those in Northern Ireland (Northern Ireland had the lowest relative housing costs out of all twelve regions). NI s cost of living also compares favourably to the RoI. The National Competitiveness Council (NCC) in the RoI note that between 2001 and 2002, Ireland overtook the UK and Sweden to become the third most expensive country in the EU for consumer goods and services. By 2003 Ireland was almost at par with Finland as the most expensive country within the Eurozone, both countries being significantly more expensive than the next group of Eurozone countries. (NCC 2004) Labour Costs for Business Labour costs are normally the most significant cost to business and will be heavily influenced by the nature of the market from which businesses and employers choose their workforce. ABI survey results for the whole economy in 2003 show that employment costs as a percentage of turnover for Northern Ireland amount to Within this sector both Drink and Tobacco are high profit industries. 13 See: DETI (2004d). 16

31 Labour Costs per cent. However, sub sectors data at the regional level for 2003 reveals that employment costs as a percentage of turnover varied considerably for the different industry groups with service-orientated sectors displaying the highest proportional employment costs (see Table 1.6 below). While for some sectors (particularly service sectors) labour costs can amount to over 27 per cent of turnover, the overall average for the economy as a whole is brought down to 16.4 per cent by sectors such as Manufacturing and Wholesale and Retail, which together account for over 50 per cent of the economy s total turnover. Table 1.6 Northern Ireland Employment Costs as a Percentage of Total NI Turnover, 2003 Description SIC Industry Sector as a % of Total Turnover (2003) Employment Costs as a % of Turnover (2003) Mining and Quarrying C Manufacturing D Electricity, Gas and Water Supply E Construction F Wholesale and Retail G Hotels and Restaurants H Transport, Storage and Communication I Post and Telecommunications K Real Estate, Renting and Business Activities K Computers and Related Activities K Source: NIABI 2003 results 17

32 Labour Costs Sub-sector Analysis of Northern Ireland Employment Costs as a Percentage of Turnover Table 1.7 Employment costs (as a % of Turnover) for Manufacturing at the Sub- sector Level (2003) Manufacture of: Employment costs as % Turnover 2003 Sub-sector as a % of total Manufacturing Turnover Sub-sector as a % of Manufacturing Employment 2003 Manufacture of Food Drink and Tobacco Manufacture of textiles Manufacture of wearing apparel Manufacture of Tanning/ Leather Manufacture of wood and wood products Manufacture of pulp, paper and paper products Manufacture of chemicals and chemical products Manufacture of rubber and plastic products Manufacture of other non-metallic mineral products Manufacture of basic metals Manufacture of fabricated metal products except machinery Manufacture of machinery and equipment not elsewhere classified Manufacture of office machinery and equipment Manufacture of electrical machinery and apparatus not elsewhere classified Manufacture of radio, television and communication equipment Manufacture of medical, precision and optical instruments, watches and clocks Manufacture of Motor Vehicles, Trailers and Semitrailers Manufacture of Furniture, manufacture not specified elsewhere ALL MANUFACTURING 14.5 Source: Employment Costs Northern Ireland ABI Survey Results,

33 Labour Costs In 2003 manufacturing employment costs were approximately 14.5 per cent of turnover. Employment costs vary considerably at sub-sector level, for example, analysis of Northern Ireland ABI data for 2003 shows that costs ranged from as little a 5.73 per cent of turnover (for Manufacturing of Food, Drink and Tobacco) up to 31 per cent (for Manufacture of Medical, Precision and Optical Equipment). Table 1.7 shows that at the sub-sector level many manufacturing sectors experience employment costs well above 14.5 per cent, however, the overall average is brought down by Food Drink and Tobacco which accounts for approximately 46 per cent of total manufacturing turnover but has relatively low employment costs as a percentage of turnover (5.73%) hence the overall average for manufacturing labour costs as a percentage of turnover is pulled down. Regional Variations in Employment Costs The Annual Survey of Hours and Earnings (ASHE) (2004) reports that Northern Ireland had the lowest average labour costs relative to all other UK regions. Figure 1.6 below shows that for full-time employees, gross weekly earnings were highest in London at (34.7 per cent higher than the national average) and lowest in the Northern Ireland at (14.5 per cent lower than the national average). Figure 1.6 Full-time Average Gross Weekly Earnings for all UK Regions London South East England East North W est South West West Midlands Scotland Yorkshire and the Humber East Midlands Wales North East Northern Ireland Great Britain United Kingdom UK excl. London and South East Source: ONS Annual Survey of Hours and Earnings (2005) 19