The context in which Irish wages are determined has altered dramatically, writes Jim Power

There is a tendency for policy makers to work on the principle that what worked in the past will work going forward. The social partnership arrangement that has guided the evolution of the Irish labour market over the past 15 years is a case in point.

The current partnership agreement, the Programme for Prosperity and Fairness (PPF), expires later this year and, if one can believe election manifestos (granted that is a big If), all of the serious political parties remain committed to the process. It is probable that whoever forms the next government will most likely throw the family silver at ensuring that a new deal is negotiated. This would be a mistake.

Supporters of the partnership approach argue that it was the foundation stone on which the Celtic Tiger was built. Back in 1987, it broke the wage/price spiral that had seriously damaged the competitiveness of the economy, which in turn had undermined the exchange rate commitment that the Republic entered into in 1979, with resultant penal interest rates.

It is argued that it was instrumental in reducing the number of industrial disputes and created a more stable environment, which increased the State's attractiveness for foreign investors.

Against this, it can be argued that in 1987 trade union density was falling, which would have resulted in fewer industrial disputes in any event. Furthermore, the forces of global competition and persistently high unemployment would have delivered greater wage stability during the 1990s with or without an agreement.

At this stage, the whole debate is pretty academic. The reality is that, when social partnership was introduced, the creation of a formal structure for setting wages generated greater certainty and obliged Government to reduce the tax burden. On balance, it was better having it than not having it.

The big question now is whether it is worth negotiating a new agreement with a rigid wage-setting process as its centrepiece? I think not.

The context in which Irish wages are determined has altered dramatically over the past three years or so. In an environment of full employment, market forces have been driving wages - many employers have had to pay up to recruit and retain workers, and have been forced to abandon the strictures laid down in the PPF.

At the same time, Government delivered on its side of the bargain in terms of tax cuts and spending commitments, but it failed to get wage stability in return. Furthermore, when inflation spiked above the level originally assumed in the PPF, the trade union movement sought a re-negotiation of the deal, which was acceded to. I wonder if inflation had turned out lower than projected would the trade unions have sought a downward adjustment to wages?

In deciding whether to seek a new agreement or not, a number of issues need to be considered.

Firstly, the dynamics of Irish economic and labour force growth over the next three years are likely to be such that the economy should continue to enjoy full employment. Therefore, market forces will continue to drive wages higher with or without an agreement. Such growth in wages is fine as long as it is matched by productivity growth; if not, competitiveness will suffer.

This would allow the labour market fulfil its new-found status as one of the only adjustment mechanisms in the economy post the surrender of interest rates, exchanges rates and fiscal policy. A flexible labour market is essential for a small open economy in a monetary union.

A second issue is the cost of any new agreement. The public finances are in a less healthy state today than at the time of the negotiation of the PPF, so Government will not have much in the way of tax cuts and spending commitments to offer in exchange for a new wage deal. The danger, of course, is that Government's love of the process will blind it to the new fiscal realities and they could end up paying too high a price in a vain attempt to buy wage stability.

Thirdly, there is the question of the democratic nature of the whole partnership approach. Is it democratic for a group of mostly non-elected social partners to sit down and negotiate an arrangement on our behalf? I think not. The social partnership approach has resulted in the growth of a huge industry and the insiders have done very well out of the process. Outsiders have not fared quite as well and greater inequality in society has been the net result.

A final issue is the impact that the upcoming benchmarking process will have on the dynamics of wage determination and, more importantly, on the public finances. Engineering a new deal that would accommodate the vagaries of public sector wages will be very difficult.

I think it is time to abandon a social partnership approach that is based primarily on the wage-setting element. By all means encourage the social partners to engage in dialogue to address issues that influence quality of life, such as health and education, but let it not be the centre of power in our democracy. Without a wage deal we could be in for serious industrial unrest but we face such a scenario with or without a deal, if recent trade union utterances are to be believed.

Jim Power is chief economist at the Friends First group