Private sector pay will drift in the absence of a ‘settled pay policy’ - IRN Article

Trade unions have been seeking baseline pay deals without productivity concessions, which is ‘two tier bargaining’ in all but name, argues employment relations expert, Brendan McGinty of Stratis Consulting. The former director of industrial relations at Ibec argues that this could erode competitiveness and prove impossible to sustain in the face of Brexit.

Current expectations are that private sector pay rises will remain in the 2-3% range across the private sector in 2018 having been close to the 2% in more recent years. This was reflected in a recent Ibec survey of its members which recorded a median increase of 2.2% in 2017. However, it is important to recognise that in key sectors such as agri-food, deals have remained at or about 2% p.a. and shorter duration deals remain in prospect, as firms struggle to navigate a range of challenges including Brexit.

“Beware of two-tier bargaining. Employers should seek cost offsetting measures in return for any increase in basic rates”

This represents real income growth at a time of benign inflation and when the Government has introduced modest tax cuts over the last two budgets. The current level of average settlement is still well below the aspirational 4% ‘call to arms’ by ICTU’s private sector unions for 2017.

The substantial improvement in labour market conditions since 2013 has been an impressive feature of Ireland’s economic recovery. The labour market has continued to improve through 2017 with unemployment now down to 6% or a nine-year low of 6.0% or 131,300 people. This compares to a euro zone average of 8.9%.

Employment growth, which is now broadly based has mainly been in the private sector and was across all sectors and regions, is c. 2.5 % per annum and with labour force growth expected to average 1.3% over the next two years and unemployment is likely to reach near full employment at c. 5.5%.

Productivity is skewed

Currently sectors such as the professional and scientific services, health and social work, financial, insurance and real estate and the accommodation and food activities sectors - account for nearly half of vacancies. Sustainable economic growth will be heavily dependent on our ability to tackle the productivity deficit across many sectors and occupations, and especially in the indigenous and locally-trading sectors. Irish labour productivity growth is skewed by a small number of firms mainly in the manufacturing and ICT sectors.

In terms of wage growth, which had been subdued relative to pre-recession trends, is now on an upward curve as the labour market tightens.Consumer price increases continue to remain well below historical levels. Over the course of 2017 inflation has remained at benign levels which cannot in the absence of other factors, justify the level of wage increases being afforded.Where nominal wage growth occurs at a faster rate than underlying inflation then households will continue to benefit from rising real income. However, the latest ESRI/CSO forecasts have predicted an annual average inflation rate of 0.2% in 2017 and 0.8% in 2018 (HICP measure).

DIFFERENTIATING DEALS

In terms of the profile of pay deals there is a need to differentiate between (i) “restorative” deals on base pay (following periods of pay freezes or reductions), (ii) deals that have productivity elements and (iii) ‘cost of living’ deals without productivity.The first category in particular has created higher ‘outlier’ settlements that if wrongly interpreted can add pressure on the general pay settlements.

Understandably, trade unions have sought to capitalise on these outcomes and to promote headline settlements based on these outliers, such as Luas and Dublin Bus, which given their publicised circumstances should be no predictors of general pay movements.The recent Irish Rail terms was influenced by the absence of agreed pay increases over recent years but what is surprising is that a base level of 2.5% should be awarded for each of the next three years, with further productivity negotiations to follow - which could give rise to further pay increases.

It is also notable that in the recent Aer Lingus case that the Labour Court recommended pay rises of 8.5% over 39 months but did so on the basis that in addition, the parties should also engage in discussions on savings with any savings then be shared on a 1:1 basis.

Since the demise of national agreements trade unions have long held an ambition for sector wage bargaining. However, such an approach has only emerged in a handful of cases which have led to Sector Employment Orders (SEO’s).As wage growth has resumed, trade unions have benefited from so called ‘pattern bargaining’, where a headline settlement is promoted and is followed by other firms within a sector. This has now evolved with trade unions seeking to secure baseline pay deals, without productivity concessions, which should only be for separate discussion, on the basis that this could give rise to further benefits – ‘two tier bargaining’ in all but name.

WRC & LABOUR COURT

Recognising of course that our dispute resolution bodies, can only deal with the facts of each case that is presented to them and that as a matter of policy they will generally not seek to lead or establish new norms, employers should be concerned if our dispute resolution bodies, in a benign inflation environment, give credibility to two-tier bargaining. Or, by default, affirm a level of base pay adjustment without productivity or cost offsetting measures.

Put simply, it is our view that employers are fully entitled to seek cost offsetting measures in return for any basic rate increases.

ABSENCE OF GUIDELINES

In what is now an increasingly fragmented IR system, these developments are occurring in the absence of any guidance, national dialogue with the social partners or a settled pay policy. If this evolution towards a type of two tier bargaining is allowed to take hold, it will erode hard won competitiveness and prove impossible to sustain in the face of the full effects of Brexit.

There will always be a cadre of employers who for various reasons have a genuine inability to pay that may need to be verified. This should be accommodated in the context of maintenance of existing terms and conditions and security of employment.We need to remember that one person’s pay increase is another’s cost increase and so, employers, need to be careful not to follow a ‘pattern’ or average rate of settlement which for them could become an unsustainable cost.

In an era of enterprise bargaining, the opportunity must be seized by employers to structure modest pay deals that are sustainable and represent fair value for that employment.For some employers, in parts of the domestic economy, or others with concerns now looming fast about the impact of Brexit, these concerns will weigh heavily on their business strategy, and their capacity to sustain employment, to attract talent and will constrain their ability to address issues of pay.

Brendan McGinty is Managing Partner of Stratis Consulting - ‘Leading People Strategies’.