Dublin Economics Workshop:There are "real risks" in moving from national pay agreements to local wage bargaining, Dr Don Thornhill and Dr Donal de Buitléir told the opening session of the Dublin Economics Workshop in Kenmare, Co Kerry last night.

Transition costs could include expensive and disruptive strikes, pay overshooting and the likelihood that vulnerable workers would lose out in the subsequent pay race.

However, Dr Thornhill, chairman of the National Competitiveness Council and Dr de Buitléir, a general manager at AIB, argued that national pay agreements must be more flexible and responsive to the competitive needs of the economy "if they are to continue as a powerful, positive force in economic development".

Future pay deals need to take greater cognisance of the requirement for the Irish economy to regain cost and price competitiveness in order to spur export growth. "We have to start taking seriously the fact that extra incomes have to be earned, especially in these more difficult times," Dr de Buitléir told The Irish Times.

In an effort to build competitiveness into the pay determination process, Dr Thornhill and Dr de Buitléir proposed a two-tier formula for pay formation.

The first component is an annual inflation adjustment. However, this basic or "platform" pay increase would not compensate employees for the rise in the level of domestic prices. Instead, the size of the basic pay award would be determined by a trade-weighted measure of inflation for internationally-traded goods and services in the economies of Ireland's trading partners.

The second component of annual pay awards would be shaped by the pace of productivity growth in the domestic economy. The size of the productivity award would be determined largely by the growth in real Gross National Product per person at work .

Dr Thornhill and Dr de Buitléir suggest this two-tier approach could serve as a future framework for pay formation under a national pay agreement. In the absence of a national agreement, it could be applied to determining pay growth in the public sector. The current public service pay agreement runs out at the end of February 2009.

They provided a hypothetical illustration of how their proposed framework would function if applied to the public service from 2009 onwards. In December 2009, the minister for finance would introduce the 2010 budget, making provision for public service pay increases in the year ahead. This provision would contain a basic or "platform" increase in public service pay, fixed by the trade-weighted inflation rate in the economies of trade rivals. These basic pay increases would be paid to public service employees in the normal way.

The second-tier productivity increase would be related to the estimated change in real GNP per person during 2009. Before the end of 2010, the amount of this global increase would be allocated to a statutory growth fund, from which payments or growth dividends could be made to individual employees during 2011.

However, Dr Thornhill and Dr de Buitléir argue that the productivity payment should be lower than the recorded productivity growth rate. Dr de Buitléir suggested that it should be fixed at around 80 per cent of actual productivity growth, in recognition of the prior payment of a basic increase and the need to regain international cost competitiveness.

In compensation, where these productivity-related pay awards or growth dividends are invested in designated investment funds for a minimum period of three years, they could be paid to employees on a tax-free basis. If the awards were taken immediately in cash, they would remain subject to income tax in the normal way.

The pay framework is based on the need to build the regaining of cost and price competitiveness into the pay determination process. Their formula is founded on three principles.

First, the expansion of exports and foreign exchange earnings offer the only route to long-run growth. Second, a pressing need to recover and enhance Ireland's international competitiveness. Third, the dependence of economic development on export growth and the need to regain cost and price competitiveness.