Everyone agrees that the Irish economy needs to restore competitiveness. Absent the possibility of devaluation, this either requires freezing nominal wages, and letting inflation erode their real value; or reducing nominal wages. The former course of action seems insufficient, since it will take too long, and we may even be heading for deflation.
So, the old Calmford Driffill literature from the 1980s may be relevant. (I couldn’t find their 1988 Economic Policy article online, but a survey article is here.)
Remember the basic point: if labour markets are very competitive, then wages will fall by themselves. If there are strong sectoral unions, on the other hand, then they may all play a game of ‘after you, my dear Alphonse’, and wages may not be cut. In that case, moving to central bargaining can help in coordinating wage cuts, in that no-one feels that they are falling behind in relative terms. Some would say that the introduction of social partnership in the late 1980s is a good illustration of that mechanism in practice. (OK, it involved wage restraint, not wage cuts, but that was useful in itself at the time, especially in the context of devaluation.)
The question for you all is: how flexible are private sector labour markets in Ireland today? We have all read about particular firms cutting wages, but how common is that? Are there studies on this? Will private sector wages fall sufficiently on their own, or is there a role for government coordination here?
3 replies on “Calmfors Driffill revisited”
Nominal wages are hard to cut, but effective wages can fall by increasing working hours and cutting perks. A friend of a friend had her “expenses” cut: an effective pay cut of 30% but the same nominal wage.
In modern Ireland, trade unions are strongest in the non-traded sector. The private (mainly traded) sector may well cut wages enough if left to its own devices. Is there a risk that centralised bargaining could inhibit the process? What would be the consequences (economic rather than social) of a further fall in wages in the traded versus nontraded sector?
I guess that in normal times you might worry that higher NT wages would lead labour to shift there, thus making it more difficult for the country to maintain external balance. With jobs in the public sector strictly rationed that is less likely to be a problem, I assume.