Pay talks must protect vulnerable in tougher times

ECONOMICS:It is vital to protect the economy as conditions worsen, but any future pay deal must also address employees' rising living costs, writes PAUL TANSEY

THERE WAS a chasm separating employers and trade unions as the talks on a new national pay deal commenced this week. On the employers' side, businesses are suffering. Growth in the markets facing Irish firms is weakening as the domestic boom runs out of steam and recession stalks Ireland's principal export markets. Efforts to hold market share in stuttering markets at home and abroad are undermined by the erosion of Irish price competitiveness.

Rising domestic prices are pushing up the cost base of Irish-based firms. To add exchange rate insult to inflationary injury, the near 20 per cent appreciation of the euro against sterling and the dollar over the past year has severely compromised the competitiveness of Irish goods and services at home and abroad.

If all of this were not enough, the availability of credit is tightening while the cost of money is rising. As the credit crunch bites deeper, Irish interest rates have decoupled from the official rates set by the European Central Bank (ECB). On wholesale markets this week, one-year money at one point was commanding a premium of one percentage point over the key official ECB rate of 4 per cent.

Taking all of these trends together, Irish businesses operating in the traded sector of the economy are facing a substantial squeeze on profits. The bottom line is bleeding. The majority of indigenous firms facing foreign competition simply do not possess the resources to finance large pay increases out of current earnings.

On the other side of the table, trade unions are also feeling the pain. On the pay front, an unanticipated surge in inflation over the past two years has wiped out most, if not all, of the purchasing power gains conferred by the basic terms of the last pay deal. Growing disparities in earnings between officers and other ranks have rubbed salt in the wounds of minimal advances in real wages over the past two years. The widening gap was brought home to public-service workers by the contrast between large awards made to some top public servants by the review body on higher remuneration in the public sector and the virtual pay standstill recommended for public-service foot soldiers in the second benchmarking report.

Moreover, the negotiations are complicated by the array of non-pay issues on the agenda.

These include the deterioration in private-sector pension provision consequent on the fall in markets and the shift to defined-benefit schemes; trade union representation rights; the treatment of agency workers; and the status of industrial relations law.

Against this background, employers are arguing that they can live only with small increases in wages under any new agreement. Trade unions are seeking, at minimum, increases in line with inflation - currently at an annual rate of 5 per cent - and prospective productivity growth.

There is a further negotiating problem centred on the prospective rate of inflation. Leading forecasters are projecting a steep deceleration in the inflation rate this year and next.

This month, the Central Bank forecast that consumer price inflation would slow from 4.9 per cent in 2007 to 3.2 per cent this year and 1.6 per cent in 2009. This view was broadly shared by the Economic and Social Research Institute (ESRI) in its last set of forecasts published in March. It anticipated that consumer price inflation would ease back to 3.4 per cent this year, before decelerating further to 2.2 per cent in 2009.

But the trade unions do not buy these forecasts. They expect inflation to remain well above the rates projected by the Central Bank and the ESRI. Having been outflanked by rising prices last time around, the unions do not want to fall into the same trap twice.

Thus, even allowing for the inevitable grandstanding by both sides prior to the commencement of negotiations, the initial gap between the bargaining positions of the two sides is very wide. Moreover, both can mount convincing cases to justify those positions.

So what is to be done? As economic conditions continue to deteriorate - in Ireland and across the industrial world - the first priority is to safeguard the economy in which people work, earn and live.

This places competitiveness at the top of the agenda. It would be counterproductive to negotiate substantial pay increases that would cause firms to close and jobs to be lost. In these difficult and uncertain times, protecting what we have is paramount.

Every effort should be made to preserve social partnership agreements and the pay deals that are their centrepiece, but not at any cost. At the same time, it must be recognised that modest pay increases would provide little solace to employees struggling with steeply rising food and energy prices, large mortgage bills and diminished wealth as house prices continue to fall. Their positions, too, need to be safeguarded.

In the context of a national pay agreement, the living standards of employees could be supported by reducing taxes on income, specifically employee contribution rates for PRSI. Last year's Programme for Government already commits the Government to cut PRSI rates for full-rate payers from 4 per cent to 2 per cent over the lifetime of this administration. It could be introduced in budget 2009.

Additionally, given the differing perspectives on future inflation, a low basic pay increase might be agreed, with a supplementary pay rise triggered where actual inflation exceeds a defined threshold.

If the current inflationary expectations of trade unions are found to be excessive, then only the modest basic increase would be paid. If they were proved correct, workers would be compensated.

This approach, however, might not recommend itself to employers who, above all, are looking for certainty in centralised collective bargaining agreements.

However, such an approach would have the distinct advantage of providing Government with a strong financial incentive for ensuring that the fall in import costs caused by the strength of the euro is actually passed on to businesses and consumers in the form of lower prices. This is manifestly not the case at present.

Of course, national pay agreements are not set in stone. If negotiators cannot reach a wage deal that benefits both sides, all bets are off and there would be a reversion to free collective bargaining. Many would applaud just such an outcome, but they should be careful of what they wish for.

Free collective bargaining would reward the strong and punish the weak. Those operating in the non-traded sector - in local monopolies and the public sector - would benefit while those in the traded sector, particularly low-skilled workers in vulnerable industries, would suffer. The transition to new types of bargaining procedures would cause dislocation and, most probably, an increased incidence of industrial disputes.

But the principal costs would be social, not economic. Social partnership has been an attempt, often muddled, at creating a common bond - a sense of belonging - among all who live in Ireland at a time when exceptional economic change has placed great stress on the social fabric. Prolonged booms usually induce sharp redistributions of income, widening the gap between rich and poor.

The evidence suggests this has not happened in Ireland. Income inequality has not decreased, but neither has it increased appreciably. Prof Robert Erikson of the Swedish Institute of Social Research wrote last year*: "The general increase in income does not seem to have been matched by a general change in income inequality, except for a possible but uncertain increase of the relative share of the very highest incomes."

The Irish social partnership model, supported by the policies of successive governments, is founded on the belief that there is such a thing as society. This is not an article of faith that should be lightly discarded. We are more than a collection of individual self-interested profit-maximisers.

*Best of Times? , edited by Tony Fahey, Helen Russell, Christopher T Whelan, IPA, 2007, page 271.