Nurses will be back on the streets soon enough
Failure to link pay to inflation means gains will be eroded
If the Central Bank’s inflation forecasts are accurate, 88 per cent of the nurses’ Labour Court award will be wiped out by inflation. Photograph: Alan Betson / The Irish Times
The proposed pay deal for nurses and midwives is offering an average pay increase of 2.5 per cent with bigger increases for younger and newly qualified nurses. They will vote on the deal next month.
There is some suggestion that a significant number of nurses will not receive any pay increase. What matters to the nurses is the nominal wage adjusted for inflation; the real wage.
The Central Bank of Ireland is forecasting inflation of 0.8 per cent and 1.4 per cent in 2019 and 2020 respectively. If these forecasts are accurate, 88 per cent of the nurses’ Labour Court award will be wiped out by inflation.
The new 2.5 per cent pay increase is on top of the pay awards contained in the Public Service Stability (PSS) Agreement 2018-2020. Ignoring two awards to workers on salaries less than €30,000, the total pay increase to nurses, January 2018 to September 2020, will be 6.4 per cent.
Of this, 2.6 per cent will be eroded by inflation, leaving a real pay increase of 3.8 per cent over a 21-month period.
The erosive effect of inflation on pay awards is a recurring theme going back to the first pay agreement in 1988. The problem is that the trade unions have consistently negotiated for nominal earnings for a period of three years into the future.
However, given the openness of the economy, accurately forecasting Irish inflation over a three-year period is virtually impossible. This means that the trade unions have to suffer whatever inflation rate is thrown at them.
If inflation turns out to be relatively high, the nominal pay award is reduced and, on occasions, completely wiped out. The result can be little or no increase in real earnings over time.
The facts speak for themselves. Between January 1988 and September 2000, four pay agreements delivered a 50 per cent pay increase to public sector workers, including nurses. Inflation eroded an astonishing 90 per cent of this increase. This is what inflation can do to nominal pay awards.
This was a period when the economy grew at about 8 per cent per annum and full employment was achieved. In contrast, the annual real pay of public sector workers, including nurses, grew by a mere 0.4 per cent.
The nurses may have bucked this trend for now, but the rest of the public sector workers are not so fortunate. Against the backdrop of a full-employment economy, they can expect a 1.2 per cent real pay increase over the next 21 months or an annual rise of 0.7 per cent.
To a large extent, the nurses’ dispute is due to the incompetence of the public sector trade unions in pay negotiations. The unions, it seems, have learned nothing from the seven pay awards between 1988 and 2008.
What the trade unions should be doing is negotiating for real, not nominal, pay awards. The arithmetic is simple. At the start of the pay agreement, the unions and Government agree an annual real pay increase of, say, 1 per cent. This is based on an inflation forecast of, perhaps, 0 per cent.
If, at the end of the year, inflation increases by 0.5 per cent, then the Government has to compensate workers by some proportion of this amount. If the full 0.5 per cent is passed on, the Government is taking the full burden of the unanticipated inflation.
This could be expensive. Given expenditure on nurses’ pay of €1,558 million in 2016, a 0.5 per cent increase would cost the exchequer €78 million per annum in inflation compensation.
The situation since 1988 is the other way around. The Government is taking none of the burden. There is no inflation compensation clause in PSS. Instead, the trade unions and their workers are taking the full hit.
How much of the inflation burden is passed on is open to negotiation. A 50/50 split would see the inflation burden being shared equally.
The problem with a real pay award is that the Government no longer has certainty with regard to public sector pay. The end-year payment to the unions is unknown and this could have serious implications for formatting the annual budget.
A positive side effect is that the Government would, most likely, adopt an inflation target to minimise the inflation-compensation payments. Currently, there are no specific anti-inflationary policy objectives in place.
If the trade unions had negotiated for a real pay increase under PSS, salaries would, in all likelihood, be relatively higher and the current industrial action by nurses may not have materialised.
A second issue relates to a “fundamental flaw” in the PSS agreement itself. That is, the omittance of monetary incentives to encourage public sector labour productivity.
Labour productivity in the public sector is a critical issue that has largely been ignored. A recent CSO report showed that the annual average change in labour productivity in public administration, education and health between 2000 and 2016 was minus 0.2 per cent.
The only way to reverse this trend is to introduce monetary incentives to encourage labour productivity.
An innovative measure would be the introduction of a new productivity pay award, independent of the current PSS agreement. After PSS expires, a new, enlarged pay agreement would amalgamate the productivity award and the pay award.
The new Labour Court agreement falls, to some extent, within this suggestion. The average 2.5 per cent pay award to the nurses is in return for new productivity and workplace reforms.
The cost to the Government in 2020 is put at more than €30 million. The Government argues that the new agreement does not contravene PSS.
But the Labour Court agreement is a fudge. A last-minute solution which violates PSS. The problem is that the nurses cannot increase labour productivity in isolation. They are an essential component in a multidimensional team.
They argue that they are seriously over-worked, under-staffed and conditions are unsafe. They point to a 5 per cent decrease in the number of nurses between 2008 and 2018. How can nurses increase their output under these conditions? It is simply not possible.
The only way of increasing nurses’ labour productivity is through significant investment in new capital, technology, training, re-structuring and the introduction of new work practices.
It is the introduction of new technology that facilitates the gains in nurses’ labour productivity. Fanciful as it sounds, the objective is for nurses to work fewer hours while simultaneously producing more output.
Perhaps copy the New Zealand example. Ironically, they got the Australians to create a world-class health service that promotes the principles of prevention, access, equity and integration.
Dr Anthony Leddin is the former head of the department of economics at the University of Limerick.