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Is social partnership essential to the Irish economy?

SUCH AN illusory concept may not survive harder times, but social partnership is a wonderful concept. It works really well on at least two levels – firstly, at the level of political propaganda. Who could object to something that is so richly suggestive of mutual understanding and common purpose? More specifically in the Irish case, who could object to something so richly suggestive of virtue when it is closely woven into the story of economic salvation and transformation that we tell ourselves, with such pride?

What was the vital ingredient in rescuing Ireland from the abyss of fiscal suicide in the mid-1980s? What was the key factor in sustaining the Celtic Tiger in the 1990s? The story is all the more compelling, of course, because this “vital ingredient”, this “key factor” was something we created ourselves.

Social partnership also works well at the theoretical level. The theory is straightforward. Many economic transactions have consequences for people other than those directly involved. For example, wage agreements between groups of workers and employers may have spillover effects in terms of price increases for consumers or for other firms, and/or in terms of reduced employment opportunities and rising unemployment.

However, the more it is that people affected by such spillover effects are brought into the bargaining arena, the more likely it is that the outcome of negotiations will take these effects into account. When all interested parties at a national level are included in negotiations, as they supposedly are in the social partnership system, the theory suggests that the outcome will reflect the national interest rather than the sectional interest of any one group.

This theoretical perspective suggests that one of the ways in which social partnership might have been expected to work in Ireland was by producing smaller rises in public sector pay than would otherwise have come about. The theory social partnership is based on suggests bilateral negotiations between public sector employers and employees produce higher public sector wages than multilateral negotiations including private sector employers and employees. The main reason for this conclusion is that the taxes required to fund the public sector wage bill are likely to be a much bigger issue for parties in the latter arrangement than in the former.

The result of a social partnership model therefore should be a lower trajectory for public sector wages and lower taxes and, due to lower taxes, more moderate private sector wage growth, since workers bargain in terms of disposable income rather than gross wages.

If this is the way in which social partnership actually worked in practice in Ireland over the past two decades or so, then the big claims made for its powers of economic redemption and transformation would indeed stand up. However, the evidence does not support this conclusion. On the contrary, the evidence suggests that under social partnership, rates of pay in the public sector rose more rapidly than they might otherwise have done, and that the reductions in tax that occurred in the Celtic Tiger period could have been even greater under a different regime.

Why has theory and actuality diverged so sharply? Three reasons come to mind. The first harks back to the point about propaganda, and it is this: successive governments have been so persuaded that social partnership is a sine qua non of a successful economy that they have been prepared to pay a relatively high price to get deals done. The second is that the private sector has been under-represented at the bargaining table. This is especially the case on the employee side: less than one-quarter of private sector workers are unionised, and those that aren’t don’t have a voice in the hallowed halls of social partnership. The third is that the private sector may have been slow to exercise what bargaining power it did have on the grounds that the economy was growing strongly, taxes were coming down anyway, and rocking a rapidly rising boat did not seem like a sensible strategy.

The fact that social partnership has coexisted with an economic boom has predictably encouraged the view that it was a causal factor. I’m more inclined to the conclusion that, in a number of important respects, causation ran the other way. A booming economy enabled partnership, or perhaps more accurately, the illusion of partnership, to be maintained because it brought comfort, eased scarcity and obviated the need for hard choices. Nowhere was this more evident than in the government’s ability to cut tax rates (while rapidly raising public spending) and thereby achieve wage moderation and enhanced competitiveness.

The big challenge, now the boom has ended and the tide of revenue buoyancy has ebbed, could not be more different. It is to improve quality of public services without tax increases or, if that is required, without impairing competitiveness through compensatory wage claims. If social partnership can rise to this, it will prove to be a much more valuable and substantial construct than I think it is.

Jim O’Leary is a senior fellow of the Department of Economics at NUI Maynooth