Ireland's independent Economic and Social Research Institute (ESRI) issued a report in December 2001, calling for a more flexible model of centralised wage bargaining that reflects the realities of EU Economic and Monetary Union and economic uncertainty. The current model of wage bargaining is viewed as too rigid.
In recent months, some commentators in Ireland have stated that a more flexible model of centralised wage bargaining is required, one that is responsive to changes in economic conditions and takes account of the new realities of EU Economic and Monetary Union (EMU). The current model of wage bargaining - which is incorporated within the existing national agreement, the Programme for Prosperity and Fairness (PPF) (IE0003149F) - is widely believed to be too rigid. The PPF is due to expire at the end of 2002, when it seems likely that a new agreement will be negotiated. In December 2001, the Economic and Social Research Institute (ESRI) issued a report which places a strong emphasis on the need for greater flexibility in the wage bargaining element of any future national agreement. The report. Smoothing adjustment through modified wage bargaining, is contained in the winter 2001 issue of Irish Banking Review published by the Irish Bankers' Federation (IBF).
ESRI report
The authors of the ESRI report are Danny McCoy and Conall MacCoille. They state that while centralised bargaining has remained in place in Ireland since 1987, and has survived periods of bust and boom, the time is now right for the wage bargaining system to be modified to reflect the new realities of EU monetary union. In the context of EMU, it is stressed, national policy responses are confined to fiscal and incomes policies, and the wage bargaining system should be adjusted 'to reflect this reality'.
The report calls for an 'additional wage term' to be incorporated into any future national agreements in order to 'reflect a greater set of contingencies based on ex-post outcomes'. This would be in contrast to the more rigid wage terms that are currently in place within the PPF. The authors point out that, when adjusted for inflation, wage trends in recent years have exceeded those agreed in national agreements. However, they suggest, 'this is not to say that national wage agreements have had no influence on wage growth.' Rather, the wage terms provided an 'anchor to expectations although they did not keep pace with actual wage growth in the economy'.
The authors argue that the need to reform the existing model of wage bargaining was clearly indicated when the pay terms of the PPF were reviewed in December 2000 in order to compensate workers for rises in the cost of living (IE0012161F). Following protracted negotiations, workers were granted an additional pay increase on top of the original pay increases awarded in April 2000.
The report identifies two main perceived flaws in the current wage bargaining model:
- an 'inability to reflect different ex post outcomes for output in the pre-set wage terms'. This has been particularly acute in the last two years when output growth was well in excess of the agreed wage terms. For instance, in real terms the economy grew by nearly 11% in 1999 while the national agreement provided only for a nominal 1% increase in wages; and
- a lack of any short-term demand-management supports offered by the present wage bargaining structures to domestic policy-makers. The 2000 renegotiation of the PPF (see above) is a 'clear example'.
The authors outline a number of proposals aimed at addressing these perceived flaws. One proposal is to develop a national 'gainsharing' initiative (IE0007153F) primarily aimed at the public sector, where, they suggest, the majority of pay pressure is evident (IE0004149F). Such a gainsharing arrangement would reflect 'ex-post' outcomes. Another proposal is to adopt a range of deferred compensation schemes, such as special savings initiatives or retirement pension accounts that have favourable tax advantages, to ensure the compatibility of the wage bargaining system with short-term demand management. These schemes could help to 'encourage deferment of spending'.
The report's authors believe that 'contingency-based contracts' between the social partners could be an important means of adjustment to external contingencies, because they would be more likely accurately to reflect the performance of the economy. This 'contingency-based contract' would take the form of an 'additional wage term'. Rather than solely setting a fixed wage increase (as currently occurs under the PPF), the report suggests that the total wage increase 'could be divided between a fixed term and a more flexible term that is made conditional on a range of ex-post outcomes in the economy over a range of variables'. These variables could encompass factors such as changes in prices, exchange rates and productivity.
An 'additional wage term', it is claimed, could be used to adjust to situations of both economic growth and slowdown. In recent years, this would have resulted in higher wage increases than provided for in the PPF, which, significantly, would have removed the need for a protracted renegotiation of the pay terms. Likewise, in the current situation of an economic slowdown (IE0110103F), a flexible wage term could 'facilitate the necessary downward adjustment'.
Commentary
It would appear likely that the ESRI proposals will, to some degree at least, constitute an important part of the wage bargaining element of any new national agreement, following the expiry of the PPF at the end of 2002. The ESRI proposals for a more flexible model of centralised wage bargaining make sense, particularly in a context of EMU and significant economic uncertainty. In particular, such proposals might have helped to circumvent the protracted renegotiation of the PPF that occurred at the end of 2000 at a time of strong economic growth. Likewise, in the current climate of economic slowdown, it seems likely that some employers may invoke the 'inability to pay clause' that is incorporated within the PPF, in an effort to reduce wage costs. The flexibility proposals might have reduced the difficulties that may arise because of this. In practice, however, the flexibility proposals may, if implemented, come up against a number of practical hurdles. A particular obstacle that stands out relates to traditional thorny industrial relations issues in the public sector, such as pay relativities. Therefore, it may prove difficult to implement a gainsharing arrangement in the public sector (Tony Dobbins, CEROP, UCD).