Muireann Kelliher
Senior Freshman
Discussion of the area of planning and social partnership is particularly relevant at the present time, given the recent Programme for Competitiveness and Work. After the last eight years under corporatism, I feel that the area needs a more central analysis. In doing so, I will discuss the rationale for planning itself and the role for government in the process. Next, I examine the Irish example and the consequences it has had for the economy, in particular the impact on unemployment and our ability to deal with the consequences of international fluctuations. I conclude that wage agreement has had a higher cost than it is worth.

The Role for Planning

It is commonly believed that a private market economy, if left to its own devices, fails to achieve the social optimal rate of economic growth. One contributing factor to the inefficient intertemporal allocation of resources is the great uncertainty concerning future movements in aggregate demand and prospects for different sectors in the economy given the small size of the Irish economy, the above is the most applicable. Hence in theory consensualist policies should be pursued to maximise social welfare. However theory doesnt always hold true. In the face of uncertainty, risky projects will be too heavily discounted and individuals will be reluctant to sacrifice current consumption for the prospect of future growth.

The problem is that the information necessary to make more measured decisions is costly for individuals to obtain in a decentralised economy. Large economies of scale and the existence of public goods suggest a role for government intervention in acquiring and publishing information. The improvement of the performance of the economy through better information is thus one objective of indicative planning. Allied to the notion of planning, is the complementary social partnership concept. This is required because the success or otherwise of a governments intervention strategy depends on the response of the private sector. For example, it is regarded as critical that since wage-setting behaviour is a major determinant of an economys performance, the government should be a part of the process. One mechanism for intervening is an institutional arrangement with employers and trade unions. The consequence of such an agreement is that the requirements of the overall economy become an issue in the labour market. Examples of corporate-style policies like those used in Germany, where centralised bargaining seemed to work well, were often cited. It supposedly delivered social stability and moderate pay rises because unions were forced to take account of the impact of pay rises on employment.

The Recent Irish Experience

Corporatism was revived in Ireland in the 1987-1990 period with the agreement on the Programme for National Recovery (PNR), which was followed between 1990 and 1993 by the Programme for Economic and Social Progress (PESP). Its successor is the newly agreed Programme for Competitiveness and Work. In theory, these agreements were meant to ensure wage moderation and hence make job creation easier. However, increases have been substantially above the rate of inflation, and wage moderation and jobs have been sacrificed for the sake of industrial peace.

There is one very strong objection to wage agreements per se irrespective of whether wage moderation is achieved. To the extent that they impose a uniform rate of wage increase on different sectors of the economy, they impair the efficient functioning of the labour market. Wage differentials are compressed irrespective of changes in economic activity. This may be bad for unemployment, for two reasons. Firstly, compression of wage differentials means a reduction in the efficiency of the economy because labour will be suboptimally allocated since workers wages will not be made equal to their marginal product. Workers will not be given the incentive to move to firms where they would be more productive. This welfare loss is likely to lead to job losses somewhere although it is hard to predict exactly how. In addition, there are likely to be direct job losses under the Irish tax system.

Firms where productivity increases less than the average will be paying too much for workers and may lay them off. With the disincentives to hiring extra workers, these jobs are unlikely to be made back by an increase in employment among the firms whose wage bills have grown less than productivity.

Apart from these general problems with wage agreements, there are even more specific problems with them as practised in Ireland. Over the six years covered by the PNR and PESP, unemployment has risen from 215,000 to 290,000. Meanwhile, insiders in the labour market have done very well. The pay rises agreed in the PESP were based on a forecast of an average growth of 2.5% in GNP which did not materialise. This has meant that all gains in the economy have gone into pay rises for those already working and nothing into creating new jobs. Most of the wage increases came in the public sector. During the six years of the PNR and the PESP, public sector pay rose by 46% , while inflation over this period was just 15%. The poor wretches in the private sector, whose taxes paid for this largesse, received 23% over the same period, or 20% if they did not benefit from the local bargaining clause introduced in the PESP. Looking at trade union participation in centralised wage bargaining, one is led to the conclusion that the numerical strength of the public sector unions within the ICTU places them in an advantageous position compared with other groups. They have used this advantage to override the interests of the more heterogeneous private sector membership of the Congress. However the public sector unions have proven themselves adept at gaining not only huge basic increases but also special increases. Interestingly the unemployed are not represented at the discussions.

The success of the public sector unions in getting large wage increases from the government has had severe budgetary implications, since public sector pay is the largest single component of government spending. With the ink barely dry on this years budget statement, the Minister for Finance is already reaching for the Tippex. For the numbers in the 1994 budget do not add up and government spending, the CBD and the EBR will all have to be adjusted upwards. The new public sector pay agreement, it was announced, was an attempt to stop rises in the pay bill due to the special increases which were common under the PESP. So an 8% basic pay rise was granted as well as a further 3% over the duration of the agreement. Apparently productivity increases would be required in return for this 3%, but already the government has given the first 1% automatically. In the light of this performance, further capitulations must be on the cards. The money given in pay increases to the public sector could have been used to begin rectifying our tax distortions in the labour market and so the excessive pay awards must be considered to have had a direct effect on unemployment.

The government has acceded all budgetary power to the trade unions in return for industrial peace. Many of the measures in this years budget were designed specifically to get the trade unions to sign up to an agreement. The tax wedge, for example, was not comprehensively reformed at all and most changes in taxation were given specifically to the union side, such as the abolition of the health and training levies. Meanwhile the employers PRSI contribution on higher-paid workers was increased. The tax wedge was merely rearranged rather than being tackled properly.

Moreover we discovered during the currency crisis that the PESP was much too rigid a framework for the economy during periods of exchange rate volatility. At the time the economy needed a lower real exchange rate, which required flexibility either in the nominal exchange rate or in wage claims. The unions would agree to neither. Devaluation would undermine the low-inflation forecasts on which agreement was based. Ironically we are now making another agreement at a time of exchange-rate uncertainty. The punt is now tracking sterling, not the deutschmark. The British clearly have no objections to a loose monetary policy in search of recovery. Whether the new agreement will be able to cope with this situation is highly debatable.

The main risk of abandoning the consensus approach to wage bargaining is the chance that lower pay rises, especially for the public sector, will provoke industrial unrest. But the risk is probably much smaller now than it was ten or twenty years ago due to changes in the size and structure of the labour force. The fall in strikes during the PNR and PESP was only following an already declining trend and there is no evidence that it was due to these agreements.

In conclusion, the whole Irish approach to wage bargaining borders on the ridiculous. The notion that the government should intervene at all in private sector wage-setting, rather than letting the market sort it out itself, is questionable. Even more dangerous is the idea that the public sector should dictate enormous wage increases of which the private sector bears the brunt, since public sector workers are less vulnerable than anyone in the country to unemployment. In theory partnership is an excellent idea but this idea has been misconstrued in Ireland with a relationship more like that between victim and bully. Given the climate and expectations that the government have now created, wage agreements have little left to offer except an increasingly wide definition of the victim category.