Increasing wages instead of tackling unemployment could hinder recovery

There has been much chatter of late about how it might make sense for the social partnership process to be revived to keep a lid on wage increases as Ireland’s economic recovery takes hold.

Don’t hold your breath, though, because the reality is neither trade unions, employers nor the Government have the stomach for it right now.

Government and employers seem content to take the chance a wage explosion won't happen. For now,
most employers are happy
to deal with pay issues at enterprise level.

The issue for unions is more complex. For a start, public-sector unions are locked into a deal – the Haddington Road agreement – that extends to 2016.

Many private-sector union members are sceptical about the merits of a new deal, given the last one wasn’t honoured in full.

There is also a view within some unions that national wage deals are bad for them as institutions. Bargaining is done at such a remote level it diminishes the connection between the union leadership and grassroots. Nevertheless, the narrative for some form of social partnership is beginning to gather momentum.

Craig Beaumont, the International Monetary Fund's mission chief for Ireland during the troika assistance programme, told a conference organised by Trinity College Dublin last week that getting people back to work must take priority over increasing the wages of those already in jobs.

He said it would be unfortunate if wages picked up in the economy generally when unemployment was still high and suggested it might be time to restart dialogue between the social partners
to ensure the long-term unemployed get a chance
to return to work.

At the end of December, Kieran Mulvey, head of the Labour Relations Commission, warned that demands for wage rises as the economy continues to recover would pose a significant challenge
to the State.

Wage agreements

“With recovery comes expectation,” Mulvey said. And he was already detecting, particularly in the more profitable areas of the private sector, “certain green shoots emerging around the pay issue”.

“There is going to be a certain amount of pent-up pressure there to move,” Mulvey added, noting this had already materialised in the retail sector and in some profitable companies.

Modern-day national wage agreements began in 1987 with the aptly named Programme for National Recovery. It was designed to get the country back to work and tackle our bloated national debt. There were, in effect, three legs to the stool – wage restraint, income tax cuts to boost living standards, and industrial peace.

It served us well for a decade or so before becoming an extended caravan encompassing all sorts of interest groups. It failed spectacularly to prevent the catastrophic policy decisions that led to the property bubble of the 2000s and resulted in initiatives such as benchmarking, which increased public-sector pay with very little by way of reforms or productivity gains extracted in return.

Our competitiveness was redefined more by accident than design when the economy crashed in 2008. Public servants are probably about 20 per cent worse off in terms of their pay and pensions, while wage cuts, reductions
in pension benefits and increased working hours (not to mention job losses) have been implemented across the private sector.

Property rents have collapsed too; arguably the most important element in reducing the cost of doing business here.

High unemployment

Yet we shouldn't be complacent. A report on competitiveness produced by Forfás, which advises the Government on enterprise, trade, science, technology and innovation, last year noted that while labour costs fell marginally during the recession, "they are now increasing at a rate close to the EU average" in spite of the exceptionally high
unemployment.

In 2011, Ireland had the 11th highest net labour costs in the OECD and the 12th highest hourly compensation costs for manufacturing. Retaining recent Irish competitiveness gains will require “significant effort”, according to Forfás.

In a corporate outlook (250 senior business leaders were surveyed by Amárach) published this week by law firm McCann Fitzgerald, 34 per cent cited a decreased ability to pay competitive wages as an issue in staff retention.

Aer Lingus chief executive Christoph Mueller was
more forthright in his opinion piece for the publication.
He believes there's a danger of confidence giving way
to complacency in the
post-troika era. "A lot of tough decisions have been avoided or fudged," he said. "The cost of living in Ireland is still alarmingly high relative to many major economies."

There will no doubt come a tipping point in the future where unions, employers and Government decide to get around the table again with a view to agreeing a new deal.

It might be the threat of industrial action. Workers at the ESB and Dublin Bus came close to pulling the trigger last year and airport staff have threatened action if the long-running saga over their pensions isn't sorted out.

Or it might be a tax-cutting agenda on the part of the Government as the clock ticks down to the general election in 2016.

Whatever it is, let’s hope we don’t waste the recovery in the way we did the boom.