Social partnership, competitiveness and exit from fiscal crisis

Abstract

The contribution of social partnership to Ireland’s economic boom remains the subject of controversy. This paper analyses at a theoretical level how a multi-period deal on wages and taxation of the type struck in the late 1980s could enhance competitiveness and facilitate an economy in escaping from fiscal crisis. Such a deal would not be possible in a spot labour market. The high unemployment rates of the late 1980s suggest that the Irish labour market of the time cannot be characterised as a spot labour market, however, and such a deal could be struck under these circumstances. Short-term tax reductions would have worsened the short-term budgetary position and hence would have been politically unacceptable. An agreement entailing a commitment by government to future tax reductions in exchange for current wage moderation on the part of organised labour imparts a supply-side stimulus to the economy and improves the immediate fiscal position. The concluding comments provide a gloomy assessment of whether partnership could play an equivalent role in the current recessionary environment.