Saturday, March 30, 2013

Money can't buy you trust

IMF experts have issued a paper setting out some issues with the advice that the IMF has given about labour market adjustment in bailout countries. It's important to note that it's a discussion paper and does not represent an official view of the IMF. Among the items considered in the paper is the wage bargaining institutions in a country and how to play into wage adjustment. Ireland is mentioned --

(p9) The second issue is whether trust can be improved over time or whether low-trust countries are condemned to endure poorly functioning labor markets. The evidence is mixed. Differences in trust across countries are large and long lasting. But increases in trust do happen. It appears to have been the case in Ireland, where the measure of trust has substantially increased since the mid-1980s (although, interestingly, it has decreased somewhat since the beginning of the crisis) ... (p16) Clearly the best way for periphery countries to achieve wage reductions is by common assent, such as through a national tripartite agreement among social partners. The problem, in general, is that workers may not believe that a wage cut is needed. Even if they do, they have to be willing to trust that price declines will follow. The commitment on the part of firms to cut prices if costs decrease is hard to verify and thus hard to enforce. The IMF recommended such agreements, informally or formally, in a number of euro area countries, but they were difficult to achieve or did not take place. In Ireland, despite a tradition of tripartite agreements from the 1980s on, discussions turned contentious when conditions turned sour. The government undertook unilateral actions on pay and pension cuts before an agreement with unions was reached again in 2010.

In other words, Ireland's once-vaunted social partnership (which was always mainly an agreement between the government and public sector unions) worked well at the very start and continued to work when there were more goodies to be handed out. Once times got rough, the fantasy held by some that we had graduated to Scandinavian social democracy evaporated. The unions came back to the table (in the form of the Croke Park Agreement) not to facilitate any national wage adjustment but to negotiate worse terms for new public sector workers than incumbents. Other parts of the IMF paper discuss the undesirable aspects of dual labor markets.