Economics:National pay agreements can count on few friends nowadays. More generally, it has become fashionable of late to denigrate the entire process of social partnership, writes Paul Tansey.

In the political arena, the partnership model stands accused of shifting the locus of real power in society from a democratically-elected Dáil to self-selecting social partners.

In the sphere of economics, the principal criticism levelled at national pay agreements - the centrepiece of the social partnership model - is that they cannot deliver pay restraint over time. Incomes policies, of which national pay agreements are a variant, do not work over the long haul.

To be successful, an incomes policy must reduce the rate of wage growth below what it would otherwise have been. Whatever chances there are of achieving such an outcome in the short term - due to appeals to patriotism, money illusion or gaps in information - incomes policies always fail in the long term. They fail because the forces of supply and demand ultimately assert themselves in the labour market.

Where, for example, labour is in short supply, employers will bid against each other for scarce workers, causing wage rates to drift above the prescribed terms of the ruling pay deal. Such wage drift has been much in evidence during the Irish boom.

So there is substance to the criticism that national pay agreements do not moderate the rate of wage growth. What then are the economic benefits of such agreements?

First, and most important, national agreements have ushered in a prolonged period of industrial peace. This has produced a remarkable outcome in recent months. For the first time since detailed records were first compiled in 1985, in the third-quarter of 2007 there were no days lost to industrial disputes. No disputes began or were in progress during the quarter. Plenty of sabre-rattling, but nobody walked.

As shown in Table 1, current trends are the culmination of a process that has been continuous since the signing of the Programme for National Recovery in 1987.

Moreover, the complex machinery for the resolution of industrial disputes, which itself is a product of the partnership process, has been crucially important in stemming the incidence of strikes. Only those who do not remember the early 1980s can dismiss lightly the pleasures of industrial peace.

Second, the trading of tax cuts for moderate increases in money wages has been a hallmark of national pay agreements. In the short run, this proved highly successful in curbing money wage growth - thereby enhancing competitiveness - while at the same time ensuring sustained improvements in workers' real incomes.

However, the hidden benefits of this initiative are often overlooked. The trade-off gave ordinary workers a taste for tax cuts. Tax cuts became universally popular. As a result, from the early 1990s the tax-cutting agenda met with minimal political resistance. Reductions in taxes on labour not only played an important part in triggering the boom, but they created an economy in Ireland that remains both adaptable and flexible.

Third, over time, social partnership has become a broad church. Following the advice once proffered by former US president Lyndon Baines Johnson, Taoiseach Bertie Ahern has taken great pains to shepherd a wide array of interest groups into the partnership tent.

On the one hand, this strategy has worked to neutralise the political impact of such groups. On the other, they have much to show for their participation.

Social partnership has become an important mechanism for protecting the poor, both within the labour market and outside it. Economic booms usually accentuate income inequality. Contrary to popular belief, income inequality has not worsened noticeably during the boom.

While the partnership model is under some strain at present, there are sound reasons for not discarding it lightly. At last month's Dublin Economic Workshop in Kenmare, Dr Don Thornhill and Dr Donal de Buitléir warned that a transition from national agreements to localised wage bargaining carried real risks of disruptive and costly strikes, pay overshooting and the victimisation of vulnerable workers.

But while there is a strong case for retaining centralised pay bargaining, the process requires updating.

As the boom in domestic demand fades, faster export growth offers the only lifeline to future prosperity. But the potential to achieve faster export growth is hamstrung by the economy's diminished cost and price competitiveness.

The rate of growth of all domestic costs must be curbed if competitiveness is to be regained and the export drive re-engineered. A domestic slowdown will take some of the heat out of domestic price and cost increases. But this needs to be reinforced by recognising explicitly the imperative of international competitiveness in any future pay deal.

Drs Thornhill and de Buitléir have proposed an outline productivity plus inflation formula for future pay increases, where the inflation adjustment is determined not by price rises at home but by the weighted average inflation rate prevailing in our trading partners.

While their model has many loose ends, it possesses one overriding attribute: it explicitly links Irish pay formation both to competitiveness and to productivity growth.

Both are essential if the economy is to emerge successfully from the current slowdown.