Protecting existing jobs is not the way to respond to increased worker mobility, write Alan Ahearne and Philip Lane
The run-up to the new social partnership talks has been dominated by the debate about greater levels of protection of jobs and pay levels. Regarding job security, it is argued that legislation is required to make it more difficult for firms to make redundancies.
In terms of pay levels, the recent surge in immigration has led to calls to ensure that increases in the supply of labour in particular occupations and industries do not erode wage levels, with a floor set at the current "going rate".
Both demands can be interpreted as a response to the increased globalisation of product and labour markets. Greater international competition among firms means that the frequency of job "destruction" is increasing, even if counter-balanced by a similar increase in the rate of job "creation".
(This process has been well illustrated in recent weeks by the loss of 350 jobs at the NEC plant in Ballivor, which closely followed the announcement of 1,100 new jobs in Carrigtwohill by bio-pharmaceutical company Amgen.)
In a similar vein, increased international labour mobility acts to moderate wage growth in those sectors most accommodating of immigrant workers.
While increased volatility of employment may be a necessary byproduct of a faster pace of productivity growth, it is undoubtedly costly for those individuals who lose their jobs.
However, the solution is not to protect existing jobs. Greater employment protection increases the risks to firms of hiring new workers, resulting in a greater reluctance to hire that pushes up the rate of long-term unemployment.
In turn, the higher average unemployment rate raises the average level of job insecurity - the very opposite to the desired outcome. Rather, as is broadly recognised by the trade union movement, the best response is to "protect workers, not jobs" by enhancing support to enable displaced workers to identify new employment opportunities and undertake the retraining required in order to secure comparable pay and conditions.
Also, a modernised social insurance system is required that better discriminates between income support for temporarily displaced workers and welfare payments for the long-term unemployed. While well intended, calls for greater regulation of wage levels (over and above the high minimum wage rate that is already guaranteed in law) are at odds with two core characteristics of the Irish economy.
First, Ireland's high growth has been associated with fast pace of structural change as workers have rapidly shifted between different occupations - in the mid-1990s, the manufacturing sector was drawing in workers; in recent years, the construction, retail and health sectors have been major growth areas.
Such dynamism requires sufficient flexibility in relative wage levels across sectors to convey useful information to current and future workers about occupational opportunities. (Indeed, this is a core principle of the union-backed benchmarking process that has sought to break long-standing rigid pay relativities across occupations in the public sector.)
Second, Ireland's membership of EMU, the economic and monetary union, means that wage flexibility is the main adjustment mechanism that is available in the event of a reversal in Irish economic activity - triggered by the relocation of manufacturing enterprises overseas, a sharp decline in the dollar or a loss of confidence in the booming construction sector (or all three!).
There is much concern about the ability of EMU members Portugal and Italy to restore competitiveness without undergoing a prolonged recession - now that nominal exchange rate devaluations are no longer feasible within the euro area, a slowing in wage growth is the central mechanism by which employment can be preserved in the event of a negative demand shock.
For this reason, establishing a regulatory framework that inhibits such wage flexibility is a high-risk strategy that places a straitjacket on Ireland's ability to enjoy the benefits of EMU without incurring unnecessary recessions whenever a downward adjustment in relative wage levels is required.
Maintaining flexibility in relative wage levels across sectors is important even in the absence of a large negative shock to the economy. Portugal's current troubles stem in large part from the loss of competitiveness suffered during the late 1990s and early 2000s, during which time the Portuguese economy was booming.
In those years, key export industries such as clothing and footwear were beginning to feel the pinch from heightened competition from low-cost producers, especially China. Portugal's inflexible wage formation process did not allow relative wages across sectors to respond sufficiently to the changing economic realities that faced Portuguese industry.
The result was rapid wage growth across the whole economy, causing wages to eventually overshoot sustainable levels.
Similarly, relative wage levels in Italy have shown little response to divergent conditions across sectors in that country. Both Italy and Portugal now face a prolonged period of enforced adjustment in order to rebalance their economies.
It is critical that the Government and social partners draw the proper lessons from the experiences of EMU to date. Failures in labour market policies can prove very costly in a monetary union.
Against a backdrop of globalisation and rapid technological change, maintaining relative wage flexibility across sectors is crucial in facilitating the continuous adaptation of the labour force to shifts in economic opportunities, which is central in raising our standard of living.
The challenge for the social partnership talks is to reform labour market and social insurance policies in ways that do not compromise the flexibility imperative.
• Alan Ahearne is vice dean for research at the Cairnes Graduate School of Business and Public Policy at NUI Galway; Philip R Lane is professor of international macroeconomics and director of the Institute for International Integration Studies at Trinity College Dublin