May 7 (Bloomberg) -- It’s payback time for Irish workers now the country has emerged from its bailout.
Last month, employees of Tesco Plc and Alliance Boots GmbH in Ireland won pay increases, following rises at Marks & Spencer Group Plc and Debenhams Plc. Labor unions representing government workers are demanding a reversal of cuts imposed during the crash, while even officials at the central bank are looking at their own “reward models.”
“For the first time since 2007, we are seeing pay pressures,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers in Dublin. “It’s not widespread, but the early signs are there and it will grow.”
The wage demands risk jeopardizing an economic recovery that helped propel Ireland back into the bond market.
The National Competitiveness Council, a government agency founded in 1997 to advise on economic policy, warned last month that Ireland is at a turning point. Irish pay on a gross basis is the eighth highest in the euro-region, and the sixth highest on a net basis, according to the council.
Demands are growing for better pay amid early signs of recovery. Employment is rising, with about a quarter of the 345,000 jobs lost since the demise of the Celtic Tiger now replaced. Ireland’s services industry grew at the fastest rate in seven years in April, an index released yesterday showed.
“The quickest and most efficient way to achieve recovery is to put more money in people’s pockets and boost domestic demand,” said David Begg, general secretary of the Irish Congress of Trade Unions. “It is a virtuous circle of recovery, as opposed to the self-defeating downward spiral of austerity.”
There’s no doubt that Irish efforts to reduce costs and budget spending helped its credibility among investors. The yield on the country’s benchmark 10-year government bond declined to 2.72 percent today compared with a peak of 14.2 percent in July 2011.
Ireland was forced to enter a three-year bailout program in 2010 after the collapse of its real estate market crippled the country’s banks. The property bubble, though, had masked a deeper-rooted threat to the economy: a loss in competitiveness. Irish unit labor costs rose 42 percent between 2001 and 2008, according to the country’s central bank.
Since taking power in 2011, Prime Minister Enda Kenny’s government has sought to revitalize the country’s economic narrative, in part by pointing to falling labor costs.
A study by National University of Ireland Maynooth economists found that about half Irish workers suffered pay cuts in the wake of the crash. However, about 40 percent saw their pay increase. Overall, average earnings fell 2 percent between 2008 and 2013, according to the statistics office.
“The idea that there has been wholesale wage cuts in manufacturing since 2006 is rubbish,” said Daniel Hickey, managing director at AllinAll Ingredients, which supplies products such as sauce mixes, seasonings and marinades to food companies in Ireland, the U.K. and Europe. “The only area where’s it’s been possible to cut wages is in the recruitment of new staff. Overall, wages are no lower than they were in 2006.”
In some parts of the economy, pay pressures are already apparent. Last year, labor costs at technology companies rose 5.5 percent, as Irish start-ups vie with multinationals ranging from Google Inc. to Twitter Inc. to hire.
The pressure is starting to spread. Some 60 percent of employers say they are concerned that pay demands are rising, according to a survey by employers group, IBEC.
Unions want pay cuts for government workers reversed after salaries were reduced by about 15 percent since the crisis began. The Communication Workers Union is seeking increases for all the 14,000 members it represents at companies like Vodafone Group Plc.
“I don’t see any formal agreement between the unions and government exchanging wage moderation for tax cuts, but there’s likely to be an implicit, silent consensus that that’s the case,” said Austin Hughes, an economist at KBC Ireland in Dublin. “It’s in the interests of the unions that more of their members or their potential members are working.”
The central bank is also untroubled, saying it sees little sign of significant wage pressure overall within the economy. Yet, as the economy grows, the pace of wage increases is expected to pick up, the bank said last month.
“It’s a fine balance for the government,” said O’Leary at Goodbody in Dublin. “On one hand, they have to give people hope. But on the other hand, we are still in a crisis time, particularly in the public finances.”
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