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Ireland’s Emerging Wage Spiral - Failing to Learn the Lessons of the Past

Wage adjustments across the economy are now commonplace, albeit with some sectors outstripping others with employers in parts of the domestic economy or those with high labour costs as a percentage of total costs still struggling to afford adjustments. Average annual earnings grew by 2.0% in 2017 compared to 1.3% in 2016. The Central Bank (Q4 Quarterly Bulletin, October 2018), predicts compensation per employee to increase by 2.8% in 2018, by 3.3% in 2019 and 3.4% in 2020. Last year hourly wages increased by 1.7% and in the first half of 2018 wage growth accelerated to 3%. This growth happened across all sectors, with the strongest growth in ICT and financial services.

In terms of collectively bargained increases in basic pay, pay settlements in 2018 depending on the sector are typically ranging from 2.0% to 2.75% currently with a small number of agreements recording settlements of 3.0%. This pattern of pay settlement is expected to repeat in 2019, save for those sectors ​​most exposed to Brexit where pay freezes are in prospect. These developments are occurring in the absence of any guidance, national dialogue or a settled pay policy. Where there is no effective policy, we leave a vacuum and this is much in evidence in current trends. If the tide goes out on the current frothy projections for economic growth, there is a real danger that we could be swimming naked and against the tide and the return to levels of wage increases we are now seeing across the economy will show that we have failed to learn the lessons of the past.

Consumer price movements are being ignored.

Inflation was low in Ireland for the past six years with the overall cost of living still the same as it was in 2008. Inflation picked up in 2018 but forecasted inflation (HICP) will still be less than 1.0% in 2019. Against this background, current nominal wage increases are growing at a faster rate than inflation and so, households continue to benefit from rising real income. Unions are focused on seeking pay improvements for members in light of cost pressures associated with housing, childcare and transport costs. However, employers are not responsible for the consequential costs of Government policy and the level of current increases are not justified by reference to actual or projected movements in consumer prices. We would do well to remember that one person’s pay increase is another person’s price increase and unless these rates of increase can be justified on productivity grounds, then a continuing trend will simply erode the competitive position of Irish firms and inevitably risk the sustainability of employment.

The productivity gap is real.

There are real concerns that pay trends are masking a serious productivity gap between the most productive multinational sector (this is skewed by a small number of firms in the manufacturing and ICT sectors) and the indigenous enterprise sectors and with SME’s in particular. Unless this is addressed, with inflation remaining benign for the foreseeable period ahead, current pay trends are already unsustainable. We are allowing pay affordability to be decoupled from productivity, giving way to higher costs for both businesses and households. This will result in an erosion of sustainable growth. Facilitating workplace innovation and delivering an uplift in labour force quality and skills at all levels is essential at a time when the World Economic Forum is forecasting that 54% of all jobs will require some element of up/reskilling by 2022. A lack of focus on productivity in labour intensive sectors and reskilling with a return to a wage-cost spiral, will see inflation erode the benefits of wage growth and lead to lower economic growth.

Pay movements, fail to recognise Brexit risks.

Growing domestic costs, rising interest rates and oil prices, along with the depreciation of sterling is now putting significant pressure on businesses already exposed to the looming threat of Brexit. We know from the study on the economic impact of Brexit, carried out by ‘Copenhagen Economics’ for the Irish Government, that a hard Brexit would hit unskilled workers on lower wages harder (by 8.7%) than skilled workers on higher wages (by 6.5%) by 2030. In the event of a softer Brexit, where the UK stays in the European Economic Area, wages for high skilled workers would be 2.6% lower, and 3.5% lower for low skilled workers than otherwise would have been. We are currently at the ‘peak of uncertainty’ about the future direction of Brexit. Approximately 15% of Irish goods and services exports are destined to the UK. In certain sectors, the UK is an especially important market, such as e.g. the agri-food sector where around 40% of exports are destined for the UK. The economic fall-out from Brexit is negative in all scenarios and will likely see income levels drop and unemployment rise in Ireland. For those sectors most at risk, the imposition of pay freezes, as an emergency measure may have to be considered or allowed for in the framing of agreements, whilst the full implications of market adjustments for business cycles and jobs are worked through. This readjustment of wages could lead to redistribution of workers across sectors, impacting up to 20,000 jobs across agri-food, manufacturing, construction and in wholesale/retail.

Through 2018, trade unions have continued to benefit from ‘pattern bargaining’, where a headline settlement is promoted and is followed by other firms within a sector. They continue to seeking baseline pay deals, without productivity concessions, which they argue should be for separate discussion, on the basis that this could give rise to further benefits – ‘two tier bargaining’ in all but name. Apart from base pay, we know that unions are also seeking improvements in other benefits including leave arrangements, bonuses and also seeking to defend and improve pension provisions.

In what is currently a tightening labour market, whilst recognising the real risks from Brexit, any proposed pay settlements must be viewed in the context of sustainability and affordability along with the impact on other employers. Employers must always remember that they are fully entitled to seek cost offsetting measures in return for any basic rate increases or other improvements and that they secure real and tangible productivity gains in any pay negotiations.

Is the public sector being allowed to lead the private sector on pay?

The recent deal on ‘pay restoration’ for up to 60,000 teachers, nurses, gardaí and public sector workers hired since 2011 represented a significant positive outcome for public sector unions and attracted little critical review. The deal costing €200m+, kicks in from March 2019 and will see new-entrants into the public service jumping two points on the relevant salary scale. Whilst it is still under challenge by some groups, it is worth an average of about €3,300 for those hired following the introduction of pay cuts back in 2010. No one begrudges those concerned from benefiting from such increases, but the implications and what it delivers bears scrutiny by all taxpayers. These commitments are being hard wired into Government spending without any new cost offsetting measures, reform or service improvements, other than what is provided under existing agreements.

Public servants are already getting pay rises worth up to 7.4% under the Public Service Stability Agreement over the course of the current PSSA pay deal, 2018-2020 (comparable to annualised increases of between 2% and 2.5%. For those hired after 2013 with CARE pensions, the PSSA gains are more like 7-10%). When the deal was concluded in 2017, private sector pay settlements at the end of 2016 were previously running at c. 2% per annum with the services sector having a lower ‘run rate’ of c. 1.5%. Whilst trends edged higher in 2017, it should never be the case that public sector pay should lead the private sector. Overall, wages were stagnant across the private sector during the downturn as most employers cut jobs or working hours, with most pay rises only having returned in the last few years.

However, it would also seem that public sector reform has slipped from the top of the government agenda in terms of ensuring full delivery of those reforms already agreed. In 2017, the EU-harmonised measure of public pay and pensions stood at €20.7bn (CSO). Since 2014 (a post-crash low point) it has grown by some €2.3bn (12.6%) or by over three times that of other government spending (at 4%). Public sector pay makes up the vast bulk of current public expenditure and is a major contributor to our business and personal costs. We should remember that despite the welcome return of economic growth, public debt currently stands at around €201 billion (68% of GDP) in 2017 and on a per capita basis, our public debt is the third highest in the developed world. The public service does an incredibly important job and all of us have a vested interest in ensuring that value for money is delivered and that public sector managers have the autonomy to reform their organisations in line with strategic priorities.

We need to debate how public sector pay should be determined.

Having now established its credibility and ahead of expiry of the current PSSA, it is time to debate giving the Public Service Pay Commission (PSPC) a greater independent role in setting out the framework for the determination of public sector pay. This would involve considering the job content of particular grades, the context (including both fiscal and economic) for setting the appropriate level of pay for any identified groups or categories based on appropriate criteria based on analysis on pay levels; comparing public service and private sector pay rates; and assessing public sector pay rates in Ireland with international equivalents. To date, the main role of the PSPC has been confined to examining pay levels across the public service, including entry levels of pay in the context of the Financial Emergency Measures in the Public Interest Acts 2009-2015 (FEMPI legislation).

Apart from the positive role currently played by the ‘Oversight Body’ representing the parties to the agreement to ensure compliance with the provisions of the PSSA regarding implementation and interpretation, a further more radical option is to have the Commission recommend approval of proposed agreements, scrutinise delivery of agreed reforms, provide verification of implementation before any conditional payments are made and ensure transparency of benefits by job category and on all aspects of remuneration across the Public Sector.

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