There is nothing like an economic crisis to stimulate social partners to sit round a table to tackle long-term reform sclerosis in order to avoid the threat of rising unemployment through loss of competitiveness.
The debate on whether the current form of wage indexation should be abandoned or replaced by more competitiveness-friendly measures is an ongoing item on the industrial relations agenda that is often determined by tensions between unions, employers and the state. But it will be a mistake to discuss wage indexation outside the context of other macro economic dynamics that have an impact on the competitiveness of our economy.
The labour market reforms of the early 1990s in Italy promoted by the socialist Prime Minister Giuliano Amato, and followed by the centre-left leader Romano Prodi, could serve as a model on how labour market and industrial relations reforms should be planned. The social pact achieved at the time eliminated the last remnants of wage indexation, liberalised to some extent the labour markets, and created better prospects for job creation and more controlled inflation.
This social pact was signed in a context of an economic crisis, appropriately labelled "emergenza occupazione" that was affecting Italy at the time with trade union concern that Italy would not be allowed to join the EMU that was steadily taking shape. Unemployment was as high as 10 per cent, with peaks of 30 per cent in southern Italy. The employment rate had fallen to 50.6 per cent. The eurozone membership and the deteriorating economic crisis were catalysts for reforms that were considered totally unacceptable to trade unions just a few years earlier.
Portugal, Ireland, Finland and the Netherlands were other EU countries that tackled long-term economic, fiscal and labour market reforms through tripartite social pacts. The success of these pacts was not always impressive. Just consider the case of Ireland where, despite a social pact that existed for a few years under the Ahern government, wage inflation was not curbed.
In our case, a social pact can only be successful if the government tackles the issue of high inflation. The Central Bank should go beyond expressing concern about this dangerous phenomenon. Even if monetary policy is now out of the Central Bank's control, it can still put pressure on the government to take remedial action to tackle the sources of our higher inflation.
Employers too need to do their part. There is no doubt that wage indexation affects our competitiveness because it is inflationary in itself. But there are other factors that can improve competitiveness. One of the main factors, in fact, is constant innovation and capital investment in new technology and training that enhances labour productivity.
The need for increased productive investment also falls on the shoulders of the government. It is becoming evident that to control the fiscal deficit the government is increasingly resorting to cutting expenditure on productive investment. The commitment to "put jobs first" in the management of our public finances will never be credible if the government continues to skimp on productive capital investment.
Only when these conditions have been satisfied can one expect trade unions to be more flexible in accepting wage improvements based on nationally set productivity and inflation norms. In fact, an ideal mechanism to wage increases could be one based on hitting targets on a balanced scorecard agreed to by all social partners. This scorecard will set benchmarks that take into consideration GDP growth, productivity improvements, inflation control, and the management of unemployment.
As the Minister of Finance rightly said when launching the pre-budget document for 2010, changes to wage indexation can never be achieved unilaterally. They need to be devised in the context of a social pact that promotes concrete action that encourages better productivity through investment and innovation, more serious inflation control and a genuine long-term commitment by all parties to promote job creation policies.
With thousands of young people entering the job market every year we need to look at ways of promoting job creation. To do this we have to overcome institutional stasis and redraw the landscape of industrial relations through the shared vision of all social partners to promote sustainable economic growth and social justice.
johncassarwhite@yahoo.com