The next cost-of-living-adjustment, amounting to 58c, has caused an uproar. Some have almost gasped in horror. Many have (wrongly) questioned how the government dares give such a low increase.
Such a question, of course, ignores two cardinal facts: one, that the amount is not decided by the government and two, that any cost-of-living-adjustment is, in fact, not paid by the government.
The amount of COLA to be paid is the result of a long-established formula. This takes into consideration inflation and the minimum wage, and compensates in a retroactive manner, that is, for past and not future inflation.
Furthermore, once the amount is established, it is employers across the country that must foot the bill, meaning that the only COLA paid by the government is that paid to its own employees, the public sector.
Inevitably, the resulting 58c has provoked a debate on how realistic the formula used is. The general feeling among many is that, with such a low compensation, the formula must be faulty.
In saying this, many ignore that in 2010, when the country was facing very difficult economic conditions, the highest ever amount of COLA was given – €5.82.
To be more explicit, just as companies were facing contracting sales and crippling energy prices, employers were being asked to carry hefty additional costs in the form of wage rises. This high amount given in 2010 also provoked a discussion then as to how adequate the COLA formula was.
The difference between the situation then and the situation now is that in 2010, it was only the employers who were questioning the COLA formula and nobody else. For the unions, COLA was cast in stone.
I assume it still is today although the present level of compensation clearly puts them in a very difficult place. Given the low inflation right across the EU and the forecast of continued low inflation, it is also likely that, for some time, the unions will have to continue to grapple with a ‘low level’ of COLA.
At Budget time, employer bodies have, year in and year out, consistently pointed out that they are not happy with the way the COLA is worked out. The main bone of contention lies in the fact that the amount of compensation is only linked to inflation and totally detached from the fundamental element of productivity.
A straightforward COLA top-up would set a precedent from which no future government will be able to withdraw
The employer logic lies in the fact that only affordable compensation should be given and that the amount that is affordable should be explicitly linked to any gains made in productivity.
This productivity principle is, however, flawed if it is only the level (measured by GDP growth) of the whole economy that is taken into account. Such a measure could provide a skewed picture if one sector of the economy is experiencing significant growth (for example, financial services) while other sectors (say, manufacturing) are experiencing a decline.
An overall GDP growth could still result in a high COLA being given even though a particular sector is experiencing difficulties.
A true measure would therefore be sectorial growth with COLA being given on a sectorial basis according to the respective GDP contribution to growth. This, however, would require sectorial and sub-sectorial data that currently is not available and would therefore take time to assemble.
It would also require a significant paradigm shift by the various trade unions.
The government is now under pressure to respond to the COLA amount being given this time. While rightly pointing out that the formula is an established one that was agreed upon by all the social partners, the Prime Minister has also said that “it is not enough”.
While remaining vague on the detail, the government has intimated that it will be assisting the most vulnerable. This, in itself, is a praiseworthy approach which, however, could carry with it considerable perils.
Depending on how it is presented, a straightforward top-up would set a precedent from which no future government will be able to withdraw. As soon as the COLA for any particular year is deemed to be too low, the government will be obliged to give additional compensation.
What if, on the other hand, the COLA is deemed to be too high? Will employers be able to put forward legitimate calls for compensation to help them get through a difficult patch?
What the government intends to do will become clear on Monday when the national Budget is presented. Whatever it decides to do, I sincerely hope it will keep firmly in mind the Blairite mantra that wealth must be created before it can be distributed.
Moving in any other direction could create instability where and when instability is least wanted.