Productivity incentives could break impasse to pay dispute

Productivity incentives could break impasse to pay dispute
Nurses on the picket line at Cork University Hospital last week. Picture: David Keane

A ‘productivity award’ independent and in addition to the ‘wage award’ in public sector pay talks could offer a means of resolving the current row, writes Anthony Leddin.

The dispute between the nurses and the government is deadlocked. Further strike action is planned by the nurses from today.

Meanwhile, the Government is sticking rigidly to the pay awards contained in the Public Service Stability (PSS) Agreement 2018-2020.

The Labour Court has declined to get involved as the divide between the two parties is too great.

So how to break the impasse?

The PSS is a excellent agreement from the Government perspective. It delivers small pay increases and introduces much-needed certainty into the budget and public finances.

From the workers’ point of view, though, the PSS is a miserable agreement. 

It increases public sector wages on four separate occasions between January 2018 and the end of 2020. (This ignores two additional awards to workers on annualised salaries less than €30,000.)

The difficulty is the effect of inflation on these awards. What matters to workers is the real wage. That is, nominal earnings adjusted for inflation. 

If wages rise by 2% and inflation goes up by a similar amount, then the worker is not any better off.

Using the consumer price index data as published by the Central Statistics Office and taking Central Bank of Ireland inflation forecasts for 2019 (0.9%) and 2020 (1%), it is possible to calculate the change in real earnings out to the end of the agreement.

If the Central Bank’s inflation forecasts are accurate, by September 2020, real earnings will increase by 1.4%.

That is a real increase in pay of 1.4% over two-and-a-half; an annual real wage increase of approximately 0.5%.

If anything, given the Brexit uncertainty, the Central Bank’s inflation forecasts are likely to be an under-estimate. In this case, real earnings could be significantly lower.

Against the backdrop of an over-heating economy, full unemployment and a surplus on both the balance of payments and the public finances, the low pay awards in the PSS are reminiscent of Celtic Tiger Ireland in the 1990s.

Déjà vu, except that this time there are no promises of income tax cuts; just the possibility of an “election budget” next time out.

The PSS is a particularly inept document. There is no transparency as negotiations are conducted behind closed doors by a very small number of government, trade union and employer representatives.

The three-year wage awards are presented without any explanation and cannot be revised.

The word “inflation” does not appear in the document.

The wage increase applies to all public sector departments regardless of relative changes in productivity.

Herein lies a possible solution to the current impasse between the nurses and government.

The PSS discusses productivity but its recommendations are aspirational. There are no incentives, monetary or otherwise, to encourage workers to deliver any specific or quantifiable targets.

What of the possibility of creating a “productivity award” agreement independent and in addition to the “wage award” contained in PSS?

Productivity incentives could break impasse to pay dispute

Monetary incentives could be offered in return for achieving quantifiable productivity targets in the future.

The term “productivity” incorporates the issue of “retention”.

Experienced nurses are much more productive than new, novice, nurses. Not to mention the costs of recruiting new nurses.

A productivity award would entail increasing nurses’ pay today in return for quantifiable gains in productivity in the future.

There is little doubt that there is a significant problem with labour productivity in the public sector.

A recent CSO publication showed that between 2000 and 2016, the annual average change in productivity in Public Administration, Education and Health was 0.7%. If the outlining year 2013 is excluded, the average change was -0.2%.

Clearly, this poor performance warrants the introduction of productivity incentives.

This may be an opportune time for such an initiative.

In theory, there should be little additional cost to the Government as the gains in productivity can be expected to offset the increases in pay.

The productivity agreement would apply to each, individual, sector within the public sector.

If the nurses can deliver productivity gains, there is no reason why they should be dragged down to the lowest common denominator by less innovative sectors.

In the future, the ‘productivity award’ should be incorporated with the ‘wage award’ into a single new agreement. Other considerations such as changes in income tax, worker mobility and working hours could also be included.

This would open the way for immediate, direct negotiations between the government and the nursing unions. 

Other public sectors can make their case in due course.

Anthony Leddin is professor emeritus and former head of economics at University of Limerick

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