English writers on the Irish economy have become masters of the non sequitur, that time-worn expository device that allows one to jump from a set of propositions to a conclusion that doesn't necessarily follow, as in: "My grandmother has a touch of 'flu. I must book the funeral parlour" or "It's started to rain. The cattle are going to drown in the lower field". In the case of our English friends it is: "The Irish inflation rate is running at 6.2 per cent. A hard landing cannot be far away." Better still, in order that the prognosis be softened by a hint of cultural empathy we have: "Irish inflation is running at 6.2 per cent. It won't be long before smiling Irish eyes turn to tears."
Yes, some of what masquerades for analysis in the English press is as naive as that. Recession follows accelerating consumer price index (CPI) inflation as night follows day. It doesn't seem to matter that the bulk of the acceleration in Irish inflation that has occurred since last July is down to external factors. It hasn't dawned on some of these pundits that rising CPI inflation is neither a necessary nor a sufficient indicator of overheating in a very small very open economy like Ireland.
Of course, there are other commentators from across the water who have moved beyond this sort of kindergarten stuff. For them, the rock on which the Irish economy will perish is not the CPI, but wages. They argue that the economy is destined for recession because wage inflation is accelerating.
The analysis here is a little more sophisticated. At least, it posits a mechanism by which wage inflation causes recession, namely the erosion of competitiveness. But, as with the more naive argument, it hinges none the less on a non sequitur.
The reason is as follows. The Irish economy is enormously competitive at the moment, partly, it must be said, because of recent exchange rate movements, but also because of more fundamental attributes.
This competitive position is fuelling the demand for labour. The demand for labour, in turn, is so strong that it is outstripping available labour supply and creating widespread labour shortages. If wage inflation were not accelerating in these circumstances, it would indicate that labour markets weren't working. But, labour markets are working, wage inflation is accelerating strongly and has been for some time.
When will this process end? Well, provided that labour markets continue to function properly, wage inflation will continue to accelerate up to the point where labour shortages have been eliminated and supply and demand have been brought back into balance. Moreover, nothing will have been lost in the process other than the surfeit of competitiveness that caused the demand for labour to exceed the supply of labour in the first instance.
The discerning reader will notice that this benign conclusion is conditional on labour markets continuing to work properly. This highlights an important point. It is this. To argue that the Irish economy is about to hit the rocks, it is not enough to observe that wage inflation has started to accelerate (we all know that, for Gods' sake), or that it will probably accelerate further (even optimists would accept that).
It is necessary to demonstrate that it will accelerate well beyond the point where labour shortages are eliminated and into the territory where unemployment starts to climb steeply again. It is necessary, in other words, to demonstrate that Irish labour markets operate so badly that wage inflation is likely to seriously overshoot.
None of the English prophets of doom have attempted to do this, with the exception of Patrick Minford in his article in this newspaper last Friday.
Essentially, Prof Minford subscribes to the "wage-inflation-therefore-imminent-slump" non sequitur. Except that to make his doomsday scenario at the same time more dramatic and more plausible, he has it that the Irish labour market has not been working at all in recent years (i.e. that wage inflation has scarcely been accelerating) because of the operation of successive national agreements.
This permits him to construct a picture of pent-up wage pressures reaching the point in the coming "winter of discontent" where the "dam breaks" and economic activity is submerged under a deluge of spiralling pay claims.
This may make for arresting imagery, but it scarcely counts as rigorous economic analysis. For one thing, it doesn't accord with the facts.
"So far, the incomes policy has held," Prof Minford claims. It has not. The latest available CSO data show hourly earnings in manufacturing and construction growing at annual rates of 5.4 per cent and 12.2 per cent respectively. Those figures relate to the middle of last year, a time when earnings would have been rising by about 2.5 per cent if the terms of the then national agreement were being observed.
Moreover, it is almost certainly the case that CSO data, were they available for the middle of this year, would show a significantly higher rate of earnings growth, for manufacturing at least. So, Prof Minford's fond notion that national agreements have demonstrably suppressed private sector wage inflation over the past couple of years is false. How could it be otherwise with the services component of the CPI rising at a 7 per cent annual rate? So, can nothing go wrong? Can we place all our trust in the smooth functioning of the labour market? Can we rule out the hard landing that Prof Minford and those other English commentators who are so solicitous of our economic health are forecasting?
Of course not. It is possible that wage inflation will seriously overshoot, even if no one has come close to offering a compelling argument that it will. But, such an outcome is unlikely, given the low level of trade union membership in the private sector, the adaptability of remuneration packages (bonuses and other performance-related payments have become big elements) and the other strides towards more flexible labour markets that have been made over the past decade or more.
Jim O'Leary is chief economist at Davy Stockbrokers
