Economics: Wage growth has been the cornerstone of the various Irish social partnership agreements since 1988, as well as a key determinant of income growth and hence spending in the economy.
However, we have limited knowledge of current pay trends as there is no published data on average earnings in the economy at large and the figures that are available on a sectoral basis are far from timely - most relate to the second quarter of 2004.
The picture that emerges, dated as it is, suggests that wage inflation accelerated at a rapid clip last year, reinforcing the view that the state of the labour market is far more significant in wage determination than any centrally negotiated wage deal.
The labour market certainly tightened in 2004. Employment, for example, grew by 57,000 in the year to the third quarter - double the growth recorded in the corresponding period of 2003. This pace of job creation was reflected in the Live Register, which fell by 11,700 in 2004, taking the total claimant count down to 159,100 and the unemployment rate to 4.2 per cent. The latter figure is now very close to the all-time low of 3.7 per cent recorded in early 2001 and implies that the economy is at, or even below, full employment.
In a flexible labour market, wage growth is likely to accelerate in such an environment as firms compete to attract and retain scarce labour, regardless of any notion of a national wage norm. Moreover, industry-specific factors also come into play - one might expect manufacturing pay growth to lag that of construction, for example, given that employment is still falling in the former and booming in the latter.
It does appear that average pay inflation in the economy as a whole has picked up, based on a weighted average of the published sector trends. Annual average pay growth had slowed to a cyclical low of 3.6 per cent in the first quarter of 2003 and then accelerated to 4.4 per cent in the final quarter. The upturn continued into 2004, with wage inflation of 5.7 per cent in the first and second quarters, and the available sectoral information points to a similar or even higher earnings figure in the third quarter.
In the private sector, the advance was led by distribution and business services, with annual earnings growth of 5.7 per cent in the second quarter, taking the average weekly pay in the sector to €617.
This was followed by construction, which saw earnings growth of 5.1 per cent in the year to the second quarter, but this accelerated to 6.8 per cent by the third quarter, no doubt reflecting the buoyancy of housebuilding.
Annual earnings growth in industry was 4.6 per cent in the second quarter of last year, down from 5.3 per cent in the first quarter.
The financial sector brought up the rear, with earnings growth of 4 per cent, although this had accelerated again to more than 7 per cent in the third quarter.
This leaves the public sector, which of course is not subject to the same market forces that impact on wage bargaining across the private sector.
In this case, the earnings data reflects part of the benchmarking awards, which underpinned an 8.2 per cent annual rise in public sector pay in the second quarter, taking average weekly earnings in the public sector to €790, equivalent to more than €41,000 per year.
This is the latest published information but, under the terms of Sustaining Progress, public sector pay was due to rise by another 2 per cent in July 2004, followed by an additional 2 per cent in December with a final portion of the benchmarking award due in June this year.
So, the combination of a tight private sector labour market and the benchmarking awards has contributed to an acceleration in wage inflation from around 4 per cent in 2003 to at least 5.5 per cent in 2004, and it is difficult to see a marked deceleration in the coming year in the absence of a slowdown in employment creation.
This begs the question as to the relevance of the Social Partnership Agreements in a full-employment economy, and especially one in which interest rates are determined elsewhere.
This loss of monetary sovereignty puts a premium on the need for wage flexibility, as that is the main avenue left for the economy to react to State-specific economic shocks. Yet, the partnership agreements seek to impose a standard wage increase across the economy, which is singularly inappropriate in theory and unworkable in practice. Moreover, the whole partnership process has become overblown and pretentious, with the wage bargaining element now accompanied by a raft of social and political aspirations, most of which cannot be delivered by the social partners alone.
Far better to dismantle the whole circus. Of course, the Government, as the State's largest employer, has to set pay for its employees, but this should be couched in these terms alone and stripped of other pretensions.
Any such pay rise agreed by the Government and the unions would of course influence other pay rates and inflation expectations in the economy, but wage rates in the private sector will continue to largely reflect market conditions, as is inevitable in any healthy developed economy.
Dr Dan McLaughlin is chief economist at Bank of Ireland.
