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Wednesday, 3 January, 2001, 16:54 GMT
Ireland's wage crunch
Dublin's Hapenny Bridge
Dublin's Fair City: Inflation prices out many first time buyers
Irish budget airline Ryanair has narrowly averted a strike by agreeing a wage deal with its airline pilots.

Its pilots will see their salary rise 15% over five years and will also benefit from stock options.

Ryanair already employs some of the best-paid pilots in Europe, but like many other Irish employers, it is finding that the only way to find and keep staff in a booming economy is to increase wages.

But some observers fear that rising wage inflation could make Ireland a less attractive place to do business - ultimately choking the boom.

Success story

The Irish economy is a European success story.

Since the mid-1990s, the economy has grown at an extraordinary rate.

Carefully-targeted European Union (EU) funding plus heavy inward investment - from the US in particular - are the principal reasons for the turnaround in the economy in the past decade.

But last year saw teachers, taxi drivers and air pilots all threaten to strike unless they received higher pay.

Some observers fear that wage demands - prompted by the country's high inflation - could erode Irish competitiveness, stunt its growth and make it less attractive to the foreign investors that helped turn the country around.

"The issue has probably come to the fore over the last 12 months," Brendan McGinty, a director at Ibec, the Irish employers' association said.

He points out that these foreign investors, which include companies such as Intel and Dell, have strong roots in Ireland now, and have plenty of reasons to stay here - including the lowest corporate tax rates in Europe.

Inflation pressure

Inflation in Ireland was 6.8% in the year to October, as measured by the Irish government. By EU measurements, inflation was 6%, compared with an EU average of 2.4%.

The weak euro - which makes imports more expensive - and the rising price of oil have forced the prices of goods on shop shelves higher.

As the euro stabilises and the oil price starts to head lower, this could help subdue goods and wage inflation.

With the economy continuing to grow strongly, many people will have cash to spend, encouraging retailers and estate agents to keep prices high.

Given that interest rates are in the hands of the European Central Bank, the government's main tool to control the amount of cash people take home is taxes.

Dismayed hawks

With that in mind, inflation hawks were likely to have been dismayed by the December budget.

In this budget, the government unveiled a tax cut package, which saw rates reduced from 22% to 20% and from 44% to 42%.

Some measures were introduced to combat inflation, namely reducing VAT and excise duties.

In the light of this expansionary budget it was seen as crucial to keep pay within the National Pay Agreement, the voluntary deal struck by unions, government and employers.

The National Pay Agreement originally allowed for a 5.5% pay increase last year, 5.5% in 2001, and a 4% rise for the final nine months.

The agreement was revamped in the wake of rising inflation, allowing for an increase of 2% from 1 April, 2001 and a one-off lump sum on 1 April next year of an equivalent value of 1%.

Payback time

One of the problems the government faces in deciding how much money to give back is that many people feel they have yet to experience the full benefits of living in boomtime Ireland.

One of the principal benefits of the boom is that anyone who needs to get a job can - a real boost in a country where unemployment has previously been close to 20% and generations of skilled workers emigrated to the UK and US to find work.

The flipside is that many first time buyers have been priced out of the housing market, while the prices of goods have also risen noticeably.

Employers have real difficulty filling positions and an influx of immigrants - mainly from eastern Europe - is shaking up an insular community.

Many policy makers believe more immigration is welcome to ease the demand for staff, in turn easing the pressure on wages.

This may provide the solution the Irish government is looking for in its attempt to control inflation - but even this may not be enough to soothe the nascent industrial unrest.

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See also:

03 Dec 00 | Business
Just another day in paradise?
08 Sep 00 | Business
Inflation hits Irish budget
08 Jun 99 | The Economy
Luck of the Irish hits home
29 Jun 00 | Business
Ireland freezes drinks prices
15 Nov 99 | The Economy
Irish boom draws the Welsh
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