Workers and trade unions seek compensation package for rising inflation

With the inflation rate standing at 6.2% in September 2000, Ireland's national agreement, the Programme for Prosperity and Fairness (PPF) has come under mounting pressure as low-paid workers and their trade unions seek pay increases to compensate for increases in the cost of living. Events in the coming months, particularly the publication of the national budget for 2001 in early December, will be crucial in determining whether the PPF will remain intact.

The Irish inflation rate has risen rapidly in recent months (IE0005151F). It stood at 6.2% in September 2000, with many commentators expecting it to reach 7% in the short term. The official average inflation forecast for the year by the Department of Finance has been revised upwards to 5.25%, as opposed to the 3% annual average predicted earlier in the year. This has placed the current three-year national pay agreement, the Programme for Prosperity and Fairness (PPF) (IE0003149F), agreed in February 2000, under considerable pressure as it is "predicated on, and dependent upon, achieving continued strong non-inflationary economic growth".

While much of the recent rise in inflation can be attributed to high oil prices and a weak euro, which are factors that have affected other countries in the "euro-zone", there are also significant domestic inflationary pressures resulting from strong economic growth and recent changes to government tax policies. The economy is now growing at a rate far above the 5.6% predicted figure for average GNP growth over the period 2000-2. The unchecked housing boom has resulted in inflated house prices, with a lack of affordable housing, particularly for those on low incomes. There is also considerable congestion in the transport infrastructure, and the task of improving the public transport system could take some time. Prices in many areas of the service sector have increased significantly, and there have been charges of profiteering in certain sectors. In addition, increased labour and skill shortages (IE0006152F) are pushing up wages in a variety of sectors, where employers are finding it difficult to recruit and retain staff. In relation to the government's budgetary policy, the targeting of income tax cuts for the higher paid in the 2000 national budget further fuelled inflationary pressures at a time when such policy action was widely deemed to be inappropriate in an economy showing distinct signs of overheating.

Workers and unions call for compensation

The current inflation rate of 6.2% and the general increase in the cost of living has meant that the 5.5% pay increase agreed under the first phase of the PPF has been cancelled out. Not surprisingly, many workers who are paid the average industrial wage (IEP 17,300 per year) or less feel that their living standards are actually deteriorating rather than improving as promised under the PPF. This is even more the case for people outside the labour market who are reliant on fixed social welfare payments, the value of which has been severely eroded.

Significant pressure has built up amongst low-paid workers for compensation for increases in the cost of living. Moreover, there is now a widespread perception that the prosperity and wealth generated by economic growth is not being distributed equitably or fairly and that employers have derived disproportionate profits and bonuses from the boom. There has been significant industrial unrest in recent months amongst public sector workers (IE0004149F). For instance, cabin crew, catering staff, and baggage handlers at the state airline, Aer Lingus, are currently engaged in industrial action over low pay. Starting pay for cabin crew at Aer Lingus is just over IEP 5 per hour, rising to about IEP 10 per hour after 24 years service.

In September 2000, a variety of trade unions representing low- to medium-paid workers called for a review of the terms of the PPF in an effort to gain a compensation package that would include a pay increase element (IE0010222N). The country's largest union, the Services Industrial Professional and Technical Union (SIPTU), is seeking a 5% compensatory improvement in workers' living standards over and above the current terms of the PPF. It seeks a combination of measures: direct pay increases; further tax cuts and reforms; and the introduction of "social wage" measures such as pension or savings bond schemes - which are a deferred means of compensating workers, and would thus be non-inflationary. Other large trade unions representing low-paid workers, such as the retail union Mandate and the Civil and Public Service Union (CPSU), have called for flat-rate pay increases specifically targeted at low-paid workers, over and above the current terms of the PPF. However, Mandate and CPSU have not placed a specific percentage figure on the increase.

In response to the concerns of workers and many of its affiliated unions, the Irish Congress of Trade Unions (ICTU) put forward a number of recommendations for compensating workers and social welfare recipients in its pre-budget submission in October. The 2001 national budget (IE0009220N) is due to be unveiled by the Finance Minister on 6 December 2000. The ICTU budget recommendations include: increased investment in childcare facilities; income tax reforms focusing on increases in personal tax-free and "pay as you earn" (PAYE) allowances and a widening of the standard rate tax band; an increase of at least 10% in social welfare payments; and the wider diffusion of innovative forms of non-inflationary compensation mechanisms such as profit-sharing schemes (IE0007153F) and deferred compensation schemes such as savings and pensions bonds.

Response from government and employers

Since the summer months, the government has been under considerable pressure to compensate workers for rising inflation. Many trade unionists have accused the government, and particularly the Minister for Finance, of failing fully to comprehend the difficulties that inflation poses for working people, and not moving quickly enough to tackle the problem.

In an acknowledgement of the serious difficulties posed by high inflation, government representatives held a meeting with ICTU representatives on 5 October. The difficulty for the government - and the social partners - is how to protect workers' living standards from increases in the cost of living without fuelling an inflationary wage-price spiral - which all sides are keen to avoid. This dilemma is particularly acute in the context of membership of the euro-zone because the government now has fewer options at its disposal to tackle inflation; it has no control over interest rates or exchange rates. It does have control over taxation, but that does not offer any immediate solution. The contents of the 2001 national budget will therefore be crucial, but it remains to be seen whether innovative non-inflationary means of compensating workers, such as profit-sharing schemes and deferred compensation initiatives, will be adopted.

ICTU also met with the Irish Business and Employers Confederation (IBEC) on 17 October. IBEC initially opposed any renegotiation of the pay terms of the PPF, and proposed that compensation for inflation should primarily be provided through taxation measures in the 2001 budget. However, there are tentative reports emanating from the recent meeting that IBEC may be prepared to consider an extra pay rise on top of the 15.75% already due over a 33-month period under the PPF, although this has been quite strongly denied by the employers' organisation. There is already a consensus between the social partners that tax cuts should be targeted at low- and middle-income earners; to share these with higher earners would only exacerbate inflation. There is also a general consensus between the social partners over the need for improved childcare, housing and public transport provision.

Commentary

There can be little doubt that Ireland's model of social partnership, which to date has contributed significantly to Ireland's economic performance, is under increasing pressure. The spotlight has come to rest firmly on the government. It is in an unenviable position. Having relinquished control over exchange rates and interest rate policy to the European Central Bank, it can rely only on fiscal policy and incomes policy to achieve its objectives. However, neither option presents an easy solution.

For the government to honour its pledge to reduce the tax burden on wage earners risks fuelling inflationary pressures even more. Furthermore, wage increases are only likely to be a partial solution. Indigenous industry which competes to a significant degree in price-sensitive markets and which is less capital-intensive than the foreign-owned sector, would find it very difficult to absorb wage increases, particularly of a significant nature. The option of deferred pay increases, paid perhaps through profit-sharing or gainsharing schemes or pension or investment bonds which may be cashed in a later date, is seen by the social partners as one possible solution. Such policies would probably need to be incentivised by preferential tax treatment and, even then, they could not be forced on all employers; any agreement to adopt such pay mechanisms would be likely to carry the rider that employers are free to accept or reject them.

In the meantime, the government and social partners can only hope that the continuing weakness of the euro on international markets might lead to an increase in interest rates by the ECB, which in turn might have a dampening effect on domestic demand. Without this, however, it is likely that inflationary pressures will persist in the short to medium term. The question of whether the partnership process is flexible enough and capable of adjusting to these inflationary "shocks" is however a difficult question to answer at this juncture. Plainly, though, the government has assumed the role of principal player, and its early neglect of inflation in deference to honouring electoral promises (granting tax concessions to all) has placed it "between a rock and a hard place". Facing it are many disgruntled workers who feel that they are not receiving a fair share of the gains emanating from economic prosperity. Whether union leaders can temper the burgeoning wage militancy, particularly in the public sector, is a difficult question to answer. Evidently the drafting of the December budget will prove be critical (Tony Dobbins and John Geary, CEROP, UCD).