TCS Daily

Celtic Tiger, Endangered Species

By Constantin Gurdgiev - February 14, 2006 12:00 AM

Ireland is commonly regarded around the world as a shining example of private markets at work. Yet, unnoticed by many, over the last five years, the country has been sliding into the abyss of rising government spending, indirect tax increases and more regulation and state involvement in the economy.

Earlier this month, Ireland's corporatist government and the so-called Social Partners - a group of narrow and self-centered vested interests that includes the largely public sector-centered trade unions, welfare-hungry NGOs and the official business interest bodies - have started a new round of negotiations aimed at securing a New Partnership deal for the future of Ireland. The New Partnership will replace the existent arrangements that effectively set the floors for wage increases across the economy and dictate the long-term labor markets and social spending programs in the economy.

Over the last 15 years, as the relevance of trade unions in the Irish economy steadily declined, the government continued to promote the interests of the organizations that, by-and-large, represent the employees in the public sector and semi-state monopolies. As Ireland's private economy grew, the government insisted on collecting an ever-rising share of domestic private-sector added value and distributing it to the Partners at the expense of the general taxpayers. This has contributed to higher inflation and astronomically high cost of living in general, leading to growing voter discontent with the government.

Yet, judging by his statement made at the opening of the new social partnership talks, our Taoiseach (Prime Minister) believes in a bipolar world of economic and social policy making. On one side of Bertie Ahern's imaginary divide are "liberal" free-market ignoramuses, who believe in the theory of freely operating labor markets and oppose the corporatist non-meritocratic model of wage setting that insured some 20-45 percent wage premium for the public sector without asking for an ounce of accountability and efficiency from the state employees. On the other side are enlightened policy makers who firmly adhere to the idea of Social Partnership, because "partnership works in practice".

Speaking about his vision for the future of Ireland, Ahern left no doubt in anyone's mind as to which camp he belongs. "I don't want any race to the bottom... I want improved take home pay and an improved quality of life," he said, fully endorsing the idea that a closed-doors agreement on wages between the state, large corporate interests, the NGOs and unions is the only means for delivering prosperity for all.

Let us test the European Socialist Model proposition that labor markets with more centralized bargaining arrangements deliver better (a) pay, (b) working conditions and social integration, and (c) quality of life than the markets with free wage setting arrangements.

To do so, consider some latest empirical studies and the data from the OECD, which compare Australia, New Zealand, UK and the US - countries with more flexible labor markets -- to the more partnership-styled labor markets of the Eurozone countries, including Ireland.

The studies show the wage growth rates in countries with more flexible and less corporatist models of the labor markets were consistently higher than in the "partnership"-styled Eurozone countries. In fact the US - the economy that is commonly cited throughout the old Europe as an example of "race-to-the-bottom" capitalism - saw higher wage growth in business sector than both the Euro zone and the average flexible-wage economy.

This month a study by US and European researchers showed that since 1976, the wage and benefits returns to long-term employees in France were consistently lower than in the US. The authors conclude that "in a low-mobility country such as France, there is little gain in compensating workers for long tenures because they tend to stay in the firm for most... of their career. In contrast, [in] a high-mobility country such as the United States... firms are induced to pay the premium... to avoid losing their most productive workers." In fact, the long-term workers in France tend to earn 3.05 times less per each extra year they stay with the firm than their American counterparts. IZA-Berlin and Stockholm Institute reported similar trends for Sweden and Germany.

Instead of protecting workers with longer tenures, social partnership contracts significantly underpay the more skilled employees. This explains at least in part why the majority of unionized skilled workers in Ireland take any opportunity to exit their "protected" jobs for the business sector, leaving the less skilled segment of our labor force in unionized employment.

Then there are the effects of labor market restrictions on productivity growth rates in the Euro area relative to that of countries with more flexible labour markets. Since 1996, the cumulative effect of the productivity gap between the two groups stands at 13.4 percent in favor of the more flexible labor market arrangements. Amongst the latter, the US workers have gained 31.1 percent in their productivity relative to 11 percent in the Eurozone since 1996.

These gains coincide with the period of lower unemployment in the flexible markets than in the "social partnership" economies. The latter fact disputes the argument that the US productivity increases are due to workers' displacement through capital investment and outsourcing. Yet, the European Socialists are keen on insisting that the US model of development favors large capital owners at the expense of the workers. The whole premise of the European social model based on partnership agreements over wages, including the one practiced in Ireland, is supposed to ensure that the state protects the worker interests.

This stated objective of the European corporatist model is not supported by the hard evidence. In fact, the cumulative wage growth in the US since 1996 was 55.7 percent - a full 24.6 percent higher than labor productivity gains alone, making US workers the greatest beneficiaries of total productivity growth. For the Eurozone, the cumulative wage growth was just 24.2 percent as opposed to 44.6 percent in the group of flexible labor market economies. Thus, less partnership-driven economies saw greater gains to workers, while more corporatist economies saw greater returns accruing to the capital owners - hardly the evidence in support of the "caring partnership" vision of our Taoiseach.

Macroeconomic data from the OECD show that more flexible labor markets support lower long-term unemployment, with a gap between the Eurozone countries and flexible wage economies remaining relatively stable at approximately 25 percent between 1996 and 2005, as illustrated above. Amazingly, unemployed residents of the "socially caring" Eurozone are four times more likely to be out of work for the rest of their lives than their counterparts in the "race-to-the-bottom" US.

Ahern and the rest of the European die-hard Socialist Corporatists are wrong in supporting the proposition that European social partnership-styled agreements on wages and labor markets can deliver on their objective of better pay and life for workers. Instead, global experience has time and again shown the corporatist controls over the labor markets to be an impediment to workers' interests.

To assure that Ireland Inc. delivers the benefits of growth to our working taxpayers and consumers, Ahern should walk away from the partnership table once and for all. To achieve conditions required for robust growth, entrepreneurship, efficient investment and betterment of taxpayers' lives throughout Europe, the Continental model surrenders to the blackmail of the militant trade unions must be thrown into the dustbin of history.


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