A key point in the yet-to-be-published OECD report on the economy is that while productivity has improved greatly, much of our remarkable performance has been attributable to some temporary factors which have boosted the supply of additional labour. For a combination of reasons, this growth in the labour supply is about to slow markedly.
We are now close to full employment, and we cannot expect a continuation of an average 16,000 a year from unemployment into work which has been a striking feature of the past six years.
Next, the number of school-leavers is now at its peak, reflecting the birth rate peak in 1980. By 1984 annual births had dropped by 10,000, so even allowing for the recent offsetting inflow of children with immigrating parents, this source of additional labour is bound to decline by about 8,000 a year by 2003.
By comparison with the past six years, these two factors alone will reduce our capacity for job growth by more than two-fifths in the period immediately ahead, cutting economic growth by almost two percentage points.
The OECD report also suggests that the flow of immigrants may be affected by rising house prices, which is probably true. However, the study they rely on for data on the stock of recent emigrants may underestimate the number involved, and the additional non-Irish element in immigration grew by over half between 1995 and 1998, when it accounted for nearly half of the total.
The tightening of the labour market has already begun to put pressure on pay rates. This has been most striking in the case of skilled construction workers, whose hourly pay rates rose by a cumulative three-eighths in four years to 1998. And there is anecdotal evidence of similar increases in the software sector.
Elsewhere pay increases have been less alarming. For unskilled workers in construction and industry, the latest data show hourly pay rises of 6 per cent, while in the financial sector weekly earnings have been rising at an annual rate of 4.5 per cent.
The truth is that a somewhat more rapid rise in pay rates has to be expected at this stage. Since 1987 pay increases in the private sector have been remarkably moderate; which has, of course, been a major contributory factor in the process of attaining full employment. This has allowed profits to rise sharply from the disturbingly low level of the 1980s.
But now that a reasonable profit level has been attained, and with full employment near, it is logical that more of the fruits of success should be shared with workers, whose past restraint has made all this possible.
Will somewhat larger pay increases impact upon the future growth of employment? They will, but so they should. Slower expansion of our labour supply makes it desirable that the demand for labour should start to ease. A modest acceleration of pay increases that would reduce the pressure of demand for workers might even help to pre-empt inflationary pressures. The pattern of pay increases needs to be related to social as well as economic needs, and these do not always coincide. Where there are skill shortages, pay will increase faster, often involving increasing disparity between the pay of better-off and less-well-off workers, as in construction sector.
The trade union movement can help to mitigate such inequities, for example, by ensuring that in the forthcoming national pay negotiation more emphasis than in the past is placed on fixed-sum rather than percentage increases.
A new element in the pay equation is next year's introduction of a minimum wage of £4.40 an hour, with a lower rate for under-18s. This is higher than in Britain, even allowing for the exchange rate difference.
I do not share some economists' ideological objections to the principle of a minimum wage, especially as our present social welfare arrangements seem to encourage employers to under-pay both part-time workers, whose income is enhanced by social welfare payments received for days not worked, and also perhaps full-time workers, whose pay is supplemented with family income support.
But an excessive minimum hourly rate, higher than the figure that a reasonably good employer in a low-margin business can pay, could create unemployment of unskilled workers. Some of these, even under present conditions, could then find it difficult to secure other work. Two years ago 23 per cent of all employees earned less than the proposed minimum wage, and its introduction was then estimated to add 4 per cent to the total wage bill.
It is disturbing to hear of informed estimates of a possible 1 per cent loss of employment at the proposed £4.40 minimum rate and, given that in relation to the average wage this looks like being the highest statutory minimum in the OECD except for France, such an employment loss would not be surprising.
One feature of this impending minimum wage has given rise to concern, echoed by the OECD: the failure to extend the lower, juvenile, rate beyond age 18. The report points out that this could lead to many teenagers quitting school prematurely.
This would undermine one of our great strengths: that such a high proportion of children remain at school to Leaving Certificate and, indeed, that 60 per cent go on to third level and a further 20 per cent attend post-Leaving Certificate courses as a preparation for work. The Government should give urgent attention to addressing this problem by extending the juvenile rates to age 21, and by also - as the OECD implies would be wise - providing for a differential between the rates paid in Dublin and elsewhere, to reflect the differential between retail wages in these two areas.
This section of the OECD report is highly critical of Government policy: obviously its authors have little time for the ham-fisted and ill-thought-out way in which this minimum wage policy has been introduced.
The report is scathing on the tendency of successive Irish governments to misapply subsidies and to succumb to populist pressure against charging for services; the absence of which leads to a massive waste of resources, of a kind and on a scale that has no parallel elsewhere.
It draws attention to the damaging extra pressure put on the housing market by the artificial subsidisation of house purchases through mortgage tax relief and the absence of any taxation on residences. These distort the market in favour of over-investment in residential property.
The OECD recommends either the phasing out of mortgage tax relief, as in the UK, or the reintroduction of our former income tax on the imputed rent from residences, as in Switzerland, and the reintroduction of a residential property tax. Such measures, with "appropriately structured capital gains tax rates which would become higher as properties are held longer" would "increase opportunity costs of inefficient land use (and) reinforce the incentive to property owners to use their land more efficiently".
It is, perhaps, a measure of how remote we in Ireland are from economic reality, and how careless we are of our scarce resources, that all these eminently sensible proposals will almost certainly be greeted with horror rather than a nod of approval, even by many readers.
Another price distortion the OECD sees as damaging is the present subsidisation of consumer electricity prices at the expense of the industrial sector; an artificial arrangement which, extraordinarily, Mary O'Rourke seems to be endeavouring to preserve.
The report also points to the wasteful scale of municipal solid waste treatment, and of water usage, reflecting the persistent failure to implement the "polluter pays" principle by charging for rubbish collection, and for overuse of water. And they go on to deplore the failure to use pricing mechanisms to limit greenhouse gas emissions.
On road congestion they say that "charging for access to . . . urban road space would go a long way towards ensuring that provision is efficient and demand controlled".
The truth is that in all these respects we are persisting in a half-baked policy of rejecting the price mechanism in favour of free provision of costly services, thus allowing resources to be wasted, as used to happen in the Soviet Union and western Europe.
Paradoxically, these outdated and highly damaging socialist-type policies are forced on our politicians largely by middle-class opinion here, which has played on the competition between parties for the support of their volatile votes.
Unless either public opinion becomes much better focused, or political parties get together on these issues to withstand these misdirected pressures, our ability to maintain a competitive economy after the end of the present period of abnormal growth will be at risk.
