A new role model - centralised wage bargaining in Ireland

To centralise or decentralise wage negotiations? In most of Europe, centralised bargaining has lost something of its former hue and is seen by many to be inflexible and cumbersome. But in Ireland, centralised bargaining has made a remarkable comeback. A recent report by a group of independent observers concludes that the competitiveness of the Irish economy has been considerably enhanced by this system of wage determination.

One of the keenest debates in industrial relations in Europe is the relationship between the institutional structure of the labour market and economic performance and, in particular, the contribution of the wage determination process to national competitiveness. Considerable attention has focused on European economies, like Germany and Sweden, whose traditionally centralised and coordinated bargaining systems have come under significant pressures in recent years. The case of Ireland has attracted less attention.

Labour Market Study: Ireland, written by a team of authors from the Economic and Social Research Institute (ESRI) and the Graduate School of Business, University College Dublin, reports that the exceptional performance of the Irish economy in recent years is due, in no small measure, to the centralisation of the wage bargaining process. The economy has seen phenomenal growth in employment and output, resulting in increased prosperity and living standards but without fuelling inflation. While this was underpinned to a significant degree by ongoing moderate growth in the international economy, the substantial additional expansion in the Irish economy can be attributed to domestic factors. Foremost amongst these has been the moderation in labour costs which led to an improvement in Ireland's international competitiveness and prompted a sharp rise in exports.

Significant growth in employment levels

Unemployment, for long amongst the highest in Europe, has also decreased significantly. Total employment increased by an average of over 45,000 per year between 1993 and 1996, while unemployment declined from almost 17% in 1993 to just under 13% in 1996. Ireland is perhaps unique amongst most European countries in that its manufacturing sector continues to show significant growth in employment, in the main due to continued inward investment, but the indigenous sector, too, continues to show significant expansion after a long period of stagnation and job losses.

The establishment of competitive wage rates

While the report acknowledges that factors other than labour costs have been important - such as the maintenance and improvement of educational standards - particular importance is attached to the role played by the negotiation of a series of nationalised wage agreements in moderating wage demands and in creating a peaceful industrial relations environment.

Since 1987, the social partners in Ireland have negotiated four three-year wage agreements. The most recent - Partnership 2000- has just been agreed (see Record IE9702103F) As well as having had a moderating effect on wage increases, these agreements have promoted considerably uniformity in pay arrangements across the economy, particularly in the private sector. The report reveals, for example, that, for the period 1987 to 1993, annual average real gross earnings rose by between 2% and 2.5% for employees in manufacturing, construction and financial services. With changes in personal income tax arrangements, agreed under the national wage agreements, the net, real take-home pay of employees rose above these levels.

Further, these wage increases were shown to be particularly moderate when compared to increases in national output. The ratio of GDP to persons at work in the economy rose by 3.3% per annum over the same period, indicating significant improvements in unit wage costs. In manufacturing it is estimated that unit wage costs declined by as much as 13%.

When Irish industrial hourly wages costs are compared to other European economies, the contribution of the national wage agreements is immediately apparent: between 1988 and 1992 hourly labour costs in Ireland rose by 17% second only to the Netherlands, and significantly less than other EU member states.

Growing pressures in the public sector

The report draws attention to some significant differences in wage movements in the public sector and private sector; a trend it considers worrying. Annual earnings amongst employees in the public sector, for instance, were 15% higher than those in the private sector in 1987 and the differential increased to 25% by 1990 and 30% by 1993. Adjusting for inflation, it is estimated that average earnings for public sector employees rose by 4.5% per year, compared to 2%-2.5% in the private sector, over this six-year period. Some of these increases can be attributed to the payment of "special" wage increases (ie, above the norm increases which had been deferred from a previous national agreement), and to changes in skill mixes and occupational structures in the civil service, but the size of the divergence would suggest that public sector wages have grown at a faster pace than those in the private sector. This is an area of key concern for the report's authors who stress the need for maintaining modest wage increases in the current national agreement and, in particular, in the public sector where wage pressures from key occupational groupings like nurses, teachers, police and lower paid civil servants have begun to build in recent months.

The absence of wage drift

Notwithstanding these current pressures, the report comments on the considerable success the wage bargaining process has had in holding wage dispersion in check within the manaufacturing sector. This is in stark contrast with the period of decentralised bargaining from 1980 to 1987 when there were significant variations between sectors with employees in the drink and tobacco industry and in the multinational-dominated chemical industry faring far better than those in other industries. With the return to centralised bargaining in 1987, however, inter-sectoral variations have become noticeably less marked. Drawing on work by Sheehan ("Crisis, strategic re-evaluation and the re-emergence of tripartism in Ireland", Brian Sheehan, Unpublished MComm thesis, Graduate School of Business, University College Dublin (1996)), the report estimates that the compliance rate for the three most recent national agreements was over 90%. Where there have been above the norm wage increases, these have been confined to a small number of companies and have not had significant knock-on implications in other organisations.

However, while above the norm wage increases may have been rare, one of the most striking features of negotiations conducted under the Programme for Competitiveness and Work (1994-96) at a local level has been the implementation of wage freezes, wage cuts and the recruitment of new employees on lower entry pay scales. It is significant also that these "concession agreements" do not necessarily make provision for catch-up wage increases once the fortunes of the organisation are reversed. Examples here include Waterford Crystal, De Beers, Krups, Bayer Diagnostics and Apple Computers in the private sector and Irish Steel and TEAM Aer Lingus in the semi-state sector. While these agreements have been confined to a small number of companies, the precedent of "concession bargaining" has been firmly established in the Irish workplace. In this respect also centralised agreements have demonstrated considerable flexibility at a local level.

Another significant feature of recent negotiations has been the moderation and compliance demonstrated by foreign-owned companies in comparison to the behaviour which characterised this sector in the 1970s and early 1980s - a reflection, inter alia, of the severity of inter-subsidiary competition within multinationals. In such circumstances, the need to be "good citizens" and adhere to the terms of a national wage agreement has provided management with a convenient excuse to concede moderate wage increases, even in instances where companies could have afforded to pay above the norm wage increases.

Labour Market Study: Ireland also offers a wide-ranging review of other aspects of the Irish labour market. It was commissioned and published by Directorate General V of the European Commission, and is one of 15 such studies for each of the EU member states.

Commentary

That Ireland should seek to maintain its centralised wage bargaining system might seem quixotic to its European neighbours, but the evidence in this report and argument presented would suggest that the Irish economy has been well served by this system of wage determination. Nonetheless, the pay pressures currently building in the public sector are likely to offer a stern examination of Ireland's social partners' and Government's ability - in this an election year - to seek a compromise to suit all parties and yet retain the benefits which have thus far accrued from its preferred system of wage negotiations. John Geary, CEROP).

Reference

"Labour market studies: Ireland", eds: J Sexton and P O'Connell, authors: J Fitzgerald, j Geary, T Lalor, B Nolan and E O'Malley, Office for the Official Publications of the European Communities, Luxembourg, December 1996

Useful? Interesting? Tell us what you think. Hide comments

Eurofound welcomes feedback and updates on this regulation

Add new comment