Social partnership is never an easy option for economic policy. So far, the consensus in Ireland has been that the benefits of partnership outweigh the costs. However, the question is now being asked whether current pressures are changing the balance of this equation. Or can partnership be redesigned to meet more complex challenges?
These pressures are coming from at least three sources. The first and most destabilising is wages, which have grown rapidly in areas of private sector skill shortage, but have lagged in most public sector occupations. This problem has led to the disintegration of national wages policies in other countries.
There is a further, less expected source of pressure from the European Union, whose Broad Economic Policy Guidelines limit the ability of member-states to offer tax cuts in return for wage restraint or, alternatively, to fund a public sector catch-up through increased spending. Ireland has already been publicly reprimanded for breaching the guidelines.
And, finally, the prospect of slower economic growth as a result of the US downturn, particularly in the technology sector, may also restrict the Government's freedom to manoeuvre. While Ireland's technology sector has developed mainly as a base for European operations, it must be borne in mind that 13 per cent of GDP depends on exports to the US - five times the euro-zone average.
The response in some quarters to these pressures has been to advocate a return to market forces in pay-setting, on the one hand, and a policy shift from the European social model to America's deregulated capitalism on the other.
What this approach ignores, however, is that Ireland's recent prosperity is due in large part to the impact and evolution of partnership over a 14-year period. The impact may be measured not just by unprecedented rates of jobs growth but also by changes in the structure of decision-making, which have enabled the Government and social partners to set long-term national objectives.
The most significant of these objectives is the vision of Ireland as a knowledge-based economy. Other countries may share this aspiration, but few have developed the capacity to pursue it strategically with a combination of foreign investment attraction in the fastest-growing areas of world trade and support for indigenous firms in local networks and supply chains. The current downturn will be a test of the resilience of Irish exporters and the extent to which foreign investors are "embedded" in these networks.
The major areas of weakness in the Irish economy are also being addressed at the same time through the ambitious National Development Plan 2000-2006, which has budgeted £40 billion over six years for public investment in infrastructure and in an expanded third-level research capability in science, technology and innovation.
While this policy framework has been effective, there is one feature which can no longer be sustained through tax cuts or other measures - centralised wage restraint. This is recognised in the latest report on Ireland by the OECD, which argues that "the social partnership needs to evolve towards setting general principles guiding pay determination rather than pre-committing fiscal policy".
THE reasons are not hard to find, reflected as they are in mounting industrial unrest across the public sector. First, although Irish GDP per head is now among the highest in the European Union, average wage rates, according to the most recent report by the Federation of European Employers (FedEE), are among the lowest.
Second, the share of national income going to profits has increased from 31 per cent in 1987, when partnership began, to 41 per cent a decade later. Correspondingly, the wages share of national income has fallen, suggesting that wage and salary earners have not participated as fully as they should in Ireland's recent prosperity.
Third, wages have risen far more slowly than productivity in the tradeable goods sector, greatly enhancing Ireland's competitiveness. According to the OECD, unit labour costs in manufacturing fell by 44 per cent between 1990 and 2000, twice as much as in the rest of the euro-zone. As a result, it has been estimated by ABNAmro that Irish labour costs are more than 10 per cent below the euro-zone average (see table).
And fourth, the lid on wages growth has actually been tightened by the latest national pay agreement, the Programme for Prosperity and Fairness. According to the European Industrial Relations Observatory, the increase in real take-home pay for Irish workers in 1999-2000 was only half the EU average. This is because the 5.5 per cent increase awarded under the PPF was reduced to 0.2 per cent when adjusted for inflation.
The conclusion we are drawn to is that if tax cuts are phased out, as the OECD and EU recommend, then Irish wages should be allowed to rise on average by around 10 per cent. However, this alternative approach must also be accompanied by increased spending on public infrastructure and services, rather than the ever-larger budget surpluses favoured by the OECD.
Despite the commitments of successive governments, Irish public spending has actually fallen as a proportion of GDP over the last 15 years from the EU average of 45 per cent to below 30 per cent.
Nor, if we look at the data, is there much sign of catch-up in the first year of the National Development Plan. While spending on social services is over-budget, due to modest improvement targets and the need to fund pay settlements, planned infrastructure projects are generally behind schedule, resulting in a budget shortfall. One of the main reasons given for this is the difficulty in attracting workers in the present tight labour market conditions.
HERE again, the strategy of increasing real wages will contribute to a solution which includes higher levels of skilled immigration, boosting overall labour supply. It would then be the responsibility of employers and unions to ensure that pay increases are matched by ongoing improvements in efficiency and productivity, possibly in the context of enterprise-level partnership arrangements.
Workers in the public sector, where productivity gains are more difficult to measure, should be entitled to comparable pay increases through the benchmarking process. In fact, there is a strong case in Ireland for institutionalising this process in a permanent, specialised pay comparability body, which would also have the role of uprating the minimum wage on a regular basis.
Concerns about the impact of wage increases on inflation have been overstated. The short-term boost to demand will help to offset any slowdown in the economy, provided external competitiveness is maintained. And, in the longer term, infrastructure investment will tackle supply bottlenecks that are among the major causes of inflation.
Social partnership need not be abandoned. It has served Ireland well for more than a decade. The challenge is to secure a fairer distribution of productivity gains at the workplace and more widely. This will also provide a sound, competitive basis for further development of the knowledge-based economy.
Roy Green is professor of management at the National University of Ireland, Galway
roy.green@nuigalway.ie