Economist sees move towards wage inflation

Professor Brendan Walsh: growth rate to slow down

The Irish economy is not facing a "hard landing", but the growth rates of recent years are not sustainable, the UCD economist, Prof Brendan Walsh has said.

Prof Walsh said rapid output would reduce unemployment and falling unemployment would generate higher wage inflation.

He said this higher wage inflation would erode the competitive position of the Republic's economy and GNP growth rates of between 3.5 and 4 per cent would return. "This is the most plausible medium term prospect for the economy," he said.

Prof Walsh was writing in the latest edition of the Irish Banking Review, published by the Irish Bankers Federation.

He said there was growing evidence that the process of wage inflation was "already underway". "Now that several years of exceptional growth have mopped up the surplus labour supply and the shortages are becoming widespread in the labour market, the traditional unemployment/inflation trade-off is re-emerging," he said.

"Competition for the available supply of labour will lead to higher wage inflation regardless of the system of wage bargaining that is put in place," he added.

He said another problem was that the Republic's labour supply was not as elastic as it was earlier in the 1990s. "The growth of the labour force over the past decade was due to non-repeatable factors such as the rise in women's labour force participation rates," he said.

However, he pointed out that further increases in the number of women participating in the workforce would only happen if pay rates are increased to compensate for rising work related costs - such as childcare and transportation.

"The reversal of net emigration is also important, but as the supply of returning emigrants dries up, the rate of immigration will be constrained by housing shortages and by restrictive policies towards non-EU citizens," he said.