It is economic insanity to suggest that pay should be linked to inflation, writes Turlough O'Sullivan.
Several weeks ago, the managing director of an Irish manufacturing company was discussing with me a painful task that awaited him. Some days later he would be standing in the canteen of his long-established business, telling the employees that the company would be closing in the summer. He too would be losing his job.
The pressures of international competition had forced down the prices his company could charge customers overseas. At the same time, costs in Ireland - local authority charges, waste disposal, electricity, telecommunications and of course pay - were going up faster than they were in the countries with which his company competed.
This man and his colleagues are not alone. There have been approaching 8,000 redundancies in the first four months of 2006, equivalent to 64 job losses per working day. That is 12 per cent higher than for the same period in 2005. In the past three to four years 30,000 jobs have been lost in manufacturing companies.
It is not helpful, therefore, to see a senior trade union figure state in this newspaper that "employers can afford generous pay rises". This suggests that it is at the absolute discretion of the employer to decide how "generous" he can be. This is the language of another century. It supposes that pay determination is some sort of arbitrary division of a cake: it supposes that managers and owners have interests that are opposed to those of employees. Not so. They all have an interest in keeping the enterprise afloat.
The same applies to the country. Ireland keeps afloat by exporting about 80 per cent of what it produces. The prosperity of each man, woman and child in this State depends on the export of goods and services to other countries.
There is one and only one determining factor in deciding how much we should pay ourselves. It is what we can afford while trading successfully with the outside world.
This is not because of some strained notion of "fairness" with employees in other countries. It is much simpler. It is about staying in business. Unlike Germany, France, the UK and other big countries, we do not have a large home market to cushion us.
Those who are working in internationally traded goods and services are only too aware of this hard reality - caught as they are in the pincer movement of falling output prices and rising costs.
For those in the protected sectors - the public services and the private sector services not exposed to international competition - the same economic reality applies but the path is not so direct.
Everyone's pay rise is someone else's cost rise. Those in protected sectors have the luxury of being able to pass their costs on to their customers at home who have little choice but to pay them. It is a short-term luxury. These cornered customers will pay State employees through taxes and will pay for other services through fees and charges, but only for as long as they remain in business.
It is economic insanity to suggest that pay should be linked to inflation. It is saying that we should add to our already very high cost base. Inflation is a curse for all of us, consumers and business.
Business cannot seek an automatic inflation adjustment in the marketplace. No sensible person could suggest that the more difficult it becomes for Irish companies to stay in business, the more we should feel inclined to push up costs and further damage our ability to trade.
We are a very well paid nation now and that is good. However, it has come at a price. Strong pay growth in recent years has substantially cut away at Ireland's ability to compete. Six years ago Ireland was fourth in the World Economic Forum competitiveness league table; today we are 26th. Over the past five years, average wages in Ireland have increased by 31 per cent, almost three times the level of wage growth in the EU and 11 per cent greater than that recorded in the US. Average earnings in 2005, at €40,000, were almost 10 per cent greater than the average in the euro area.
As a result of high nominal wages and the lowest effective tax rate in the OECD, Irish workers benefit from the second highest level of take-home pay in the EU. Ireland's statutory minimum wage has increased by 37 per cent since 2000 and is now the second highest in the EU after Luxembourg.
Average industrial earnings have increased by 32 per cent since 2000 while cumulative inflation over this period was 19 per cent, resulting in a real increase in industrial earnings of 13 per cent - almost three times the rate of increase recorded in the EU 15. Tax cuts have meant an even higher increase in take-home pay.
Wages have been increasing much more rapidly than company profits in recent years. Between 2002 and 2004, wages as a percentage of GNP increased by 18 per cent while company profits grew by only 5 per cent.
Those calling for high pay increases also ignore the glaring fact that there was zero aggregate productivity growth in the Irish economy in 2005.
Every one of us has an interest, direct or indirect, in Ireland succeeding as a trading nation. We have lost ground in recent years. It is time for each of us to be strategic about our future.
Turlough O'Sullivan is director general of Ibec, the employers' body.