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Do Austerity-Induced Labor Market Reforms Explain the Irish Recovery?

0 Comments 🕔08.Aug 2016

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This article is part of our feature Policy-Making Under the Troika.

by Aidan Regan

When the economic crisis hit Ireland in 2008, the Irish model of social partnership, which was built around a centralized wage bargaining process, collapsed. These centralized wage agreements were sponsored by government, and negotiated via the Prime Ministers Office with the Irish Employers and Business Confederation (IBEC) and the Irish Congress of Trade Unions (ICTU). The collapse, however, had nothing to do with the EU, IMF, or the European Central Bank (hereafter the Troika). Contrary to what has occurred in Southern Europe, these institutions did not require supply-side reforms from Ireland because its labor market is already highly flexible. This flexibility stems from the common law and voluntarist nature of its industrial relations regime. Labor law is minimal and most employment protection legislation comes down from the EU.

Social partnership collapsed because the actors were perceived to be responsible for the fiscal crisis. The entire regime was built around a national tax-based incomes policy that increased public spending and cut income taxes. When the economic crisis hit, the fragility of this Faustian bargain was exposed. Trade unions, in particular, lost legitimacy and government subsequently implemented a unilateral fiscal adjustment that included public sector wage cuts.

Despite this collapse of social partnership the government re-centralized the collective bargaining and industrial relations process in the public sector, leading to two important collective agreements: Croke Park and Haddington Road. These bipartite collective agreements were negotiated autonomously from the Troika. They facilitated the implementation of the government adjustment, however, because unions agreed to a no-strike clause in return for no further pay cuts.

In this regard, centralized collective bargaining institutions in the public sector enabled rather than disabled the government’s ability to implement an internal devaluation, required as part of EMU membership. In the absence of these public sector agreements, and their “rigid” industrial relations institutions, it is highly questionable whether the government could have implemented the adjustment (both before and after the Troika agreements) whilst avoiding social unrest.

Furthermore, there has been increased state regulation of labor relations. In response to weak employment protection in the low-paid sectors of the economy, the 2011-2016 centre-right Fine Gael/Labor coalition introduced new regulatory policies that included: the re-establishment of sectoral wage-setting institutions for the low paid sectors of the economy; the establishment of a low-pay commission; increased the minimum wage; and introduced new collective bargaining legislation (there is still no legal requirement for employers to engage in collective bargaining). Trade unions have been involved bilaterally in these reforms, but the main actor responsible for these changes was the minority Labor Party in government.

However, whilst collective bargaining has been re-centralized in the public sector, it has been decentralized to the enterprise level in most of the private sector. In most of the non-unionised sectors, the adjustment has occurred via a reduction in jobs and employment, rather than wages and working hours. In contrast, the competitive traded sectors of the economy, particularly in the US tech sectors, have been immune from the austerity that has occurred within the public sector and have experienced wage and employment growth. The US multinational sectors (particularly computer and information service firms such as Google), which are so central to Ireland’s export recovery, benefit from the high levels of labor market flexibility and are almost entirely non-union. They have their own internal labor market rules and can hire and fire at will.

All of this leads to an important contradiction for scholars of political economy.

On the one hand, strong unions and centralized collective bargaining institutions in the public sector have made possible the government’s ability to impose austerity. It is in these unionized sectors that wage coordination aimed at internal devaluation has been made possible. On the other hand, weak unions and the highly flexible nature of the private sector, has facilitated inward investment from US multinationals, which has supported an export-led recovery. These firms have also been increasing wages during the crisis, thereby facilitating higher levels of domestic consumption, during the public sector adjustment.


Aidan Regan is an Assistant Professor at the School of Politics and International Relations, and Director of the Dublin European Institute (DEI), at the University of College Dublin (UCD).

This article is part of our feature Policy-Making Under the Troika.


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