The Economic Crisis and A Race to the Bottom – Easy Bedfellows?

The Citizen: Issue 3
Autumn 2010

Author: Michelle O’Sullivan

The current economic crisis has brought much debate as to how the country can recover and the strategies that the government should pursue to lead the recovery. Unfortunately, in relation to labour-market measures, much of the discussion has consisted less of debate and more of tit-for-tat arguments between public and private sector workers on recent public sector wage cuts. The time spent on these arguments has diverted people away from discussions on the broader attempts to force downwards the pay and conditions of all workers by the government and some employers. This article discusses some of the most prominent examples of the neo-liberal push towards the ‘race to the bottom’: the attempts to cut the minimum wage and the public sector pay cuts. The discussion is not limited to Ireland, and efforts by unions in some countries to resist a race to the bottom by some employers and employer bodies have been threatened by decisions of the European Court of Justice (ECJ). While the EU has been influential in providing substantial employment protection to Irish workers, decisions by the ECJ have diluted some of the worker-protection elements of EU directives, so problems faced by workers are not just an Irish but also an EU-wide problem.

A frequent sound bite from the Irish government, IBEC, and, at times, the ESRI during the economic recession has been that the country has become uncompetitive, labour costs are too high, and thus wages need to fall in order for competitiveness to be restored. This argument has been made despite evidence that provides an alternative perspective. Professor Paul Teague of Queen’s University comments that while wages grew for much of the last two decades, wage growth was below productivity increases so that unit labour costs fell, amounting to a depreciation in real wages. In addition, research by Professor Teague shows that since the early 1980s the share of Irish GDP going to labour has been declining sharply. In 2001, the share of labour in national income was 54.2 per cent compared with 70.7 per cent in 1986 and an EU average of 67.2 per cent in 2001. Thus, as Professor Teague notes, the labour share of income has decreased, while the share of income going to profits has increased substantially. However, such evidence has been ignored, and the government and employer groups have pursued a strategy of driving down wages.

One strategy by employer groups has been to lobby the government and take legal action in an attempt to reduce the minimum wage rate set by the system of Joint Labour Committees. The predecessor of these committees was established by Winston Churchill’s Government in 1909 because it was recognised that there were workers who were particularly vulnerable to ‘market forces’ – vulnerable because of their especially low pay and lack of union organisation. The committees as they are today were provided for in 1946 legislation by Sean Lemass’s government. While the labour market and society have changed significantly since Churchill and Lemass’s time, some groups of workers continue to be vulnerable to the vagaries of the market. The committees originally covered workers in clothing manufacturing. Today, they primarily cover workers in service sectors such as cleaning, retail, hotels, catering, and security-employments characterised by low pay; low unionisation and collective bargaining; part-time, seasonal, and temporary work; and high numbers of migrant workers. In 2008, a new employer body (the Quick Service Food Alliance), comprising fast food employers such as McDonald’s, Supermac’s, and Burger King, has gone further than lobbying and launched a constitutional challenge against the Joint Labour Committees. The chairperson of the Quick Service Food Alliance has claimed that the aim of the constitutional challenge is to get rid of the committees because they are a costly burden on employers and they cost workers their jobs. This ‘employment effect’ argument was also made by the British Conservative government in 1993 when it abolished the equivalent body there to the Joint Labour Committees.

A second argument made by Irish employers is that the Joint Labour Committees’ regulations are unnecessary because workers are sufficiently protected by employment legislation and the national minimum wage. Yet, the national minimum wage has also been under attack from employers. The Restaurants Association of Ireland has called for a reduction in the national minimum wage rate from €8.65 to €7.65. In doing so, the Restaurants Association compares Ireland’s minimum wage with Spain (€1.93) and the UK (£5.38). However, a 2008 Eurostat study found that Ireland’s national minimum wage is lower than that of the UK in terms of purchasing power parity. In addition, average earnings in accommodation and food services in Ireland are already the lowest in the country (€350 per week). Worryingly for workers covered by the committees, employers’ views have attained political support from Fine Gael. Its then spokesperson on Enterprise, Trade, and Employment, Leo Varadkar argued in the Dáil that industries covered by Joint Labour Committees were losing jobs because they could not meet their regulations. In the short term, the committees are likely to be protected by a bill proposed by Fianna Fáil that addresses the legal challenge of the fast food employers. The proposed bill to protect Joint Labour Committees is a remnant of a commitment made in the last social partnership agreement to strengthen the committees. However, the government has also appeased employers by including a provision that will allow them to claim inability to pay the minimum rates – surely, defeating the purpose of minimum wages.

A second strategy to force down wages has been the government’s cutting of public sector wages. The general thrust of arguments presented by some economists is that the public sector is bloated and overpaid. Economists argue that the price for public services is too high compared to other EU countries and that public service employees are privileged insiders. Yet, a 2008 OECD report noted that in 2005 Ireland still had the third lowest public expenditure rates in the OECD as a percentage of gross domestic product. While the number of public service employees increased significantly by 30 per cent between 1995 and 2007, the OECD comments that this was from a low base relative to other OECD countries, and it concluded that, in comparison with other OECD countries, Ireland delivered public services with a public sector that is relatively small given the size of its economy and labour force. The ‘privileged insider’ argument focuses solely on high-earning public servants. Clearly, there are some public sector workers who earn large amounts and who were close enough to government to have some of their wage cuts reversed in December 2009. However, public servants on less than €35,000 a year could hardly be described as privileged insiders. While the government has readily instituted a pension levy and wage cuts against public servants, those who are partly responsible for the economic crisis have not suffered due to the ‘legal or constitutional protections’ they enjoy. In addition, while unions point to the lack of fiscal penalties imposed on high earners engaging in tax avoidance, economists do not point to such groups as privileged insiders.

The attempts by Irish unions to resist the downward pressure on wages and conditions have been weak; but, even when strong and seemingly successful pressure has been exerted by unions in other countries against a race to the bottom, the ECJ in particular has called a halt to their success. The forces of globalisation exert similar pressures on workers across countries; and even in countries with strong social democratic traditions and strong unionisation, the ability of unions and governments to ensure equal terms and conditions for native and migrant workers has been endangered by decisions of the European Court of Justice. The Viking and Laval cases arose out of the employment of migrant workers on terms and conditions inferior to the host country’s laws or collective agreements. The ECJ had to weigh up the rights of employers to free movement of goods and services and the rights of workers to collective action. The Viking case concerned legal action taken by a Finnish shipping company against the Finnish Seamen’s Union. The union took collective action against the company after it reflagged one of its ships with an Estonian flag and employed Estonian workers on lower wages than contained in Finnish collective agreements – events similar to the Irish Ferries dispute in 2005. The ECJ ruled that the union’s collective action was a restriction on the freedom of establishment (the right of firms to locate freely in one or more EU countries).

In the Laval case, the Swedish Building Workers’ Union boycotted Laval after they failed to reach agreement on the application of the construction industry collective agreement. Laval had employed Latvian workers to perform a school repair contract at forty per cent lower wages than Swedish workers would be paid. Laval took a case against the union’s industrial action, and the case was referred to the ECJ. The court concluded that industrial action in the form of a blockade of sites constituted a restriction on the freedom to provide services, which was not justified with regard to the public interest of protecting workers. In addition, the union wanted to negotiate more favourable pay and conditions than contained in Swedish law, but the ECJ decided the use of a collective agreement containing more generous terms and conditions than set out in law was not an acceptable means of implementing the Posted Workers Directive. One implication of the Viking and Laval cases has been the imposition by the ECJ of restrictions on unions’ right to take industrial action to prevent social dumping when the union does not satisfy the tests laid down by the court. These tests are that industrial action must be for reasons of ‘over-riding public interest’ and must be justified and proportionate. To be justified, the industrial action must protect workers’ rights; to be proportionate, the ECJ noted that consideration should be given as to whether a trade union has ‘other means at its disposal which were less restrictive of freedom of establishment’ and has ‘exhausted those means.’ The implication is that unions will have to show that these tests are satisfied if legal action is taken against them for taking industrial action, thereby substituting lengthy and costly legal processes for collective action and negotiation.

A more recent legal development in the area of trade union rights was the decision by the European Court of Human Rights in the Enerji case. The case concerned a circular from the Turkish government that prohibited public sector employees from taking part in a strike. Enerji is a civil service union and took the case alleging a breach of its trade union freedoms. The ECHR found that a trade union’s ability to defend its members’ interests is inextricably linked to the right to strike and that such a right ‘can only be limited in narrowly defined circumstances which must be provided for by law, have a legitimate aim and be necessary in a democratic society’ (European Trade Union Confederation, 2009). On foot of this decision, the ETUC has argued that ‘internal market restrictions are not sufficient to offset the fundamental right of trade unions to defend workers’ interests.’ This decision places significant weight on trade unions’ right to strike.

Thus, the working class in the public and private sectors in Ireland have seen their wages come under threat or be reduced. In the ‘low road’ services sector, employers argue that the minimum wage costs jobs, implying that low pay is better than no pay. The challenge to minimum wages by fast food employers and the Restaurants Association of Ireland is a direct attack on the most vulnerable workers in society. While the recession has left many businesses struggling, the economic circumstances have been used by some fast food companies as an opportune window in which to instigate change. The Migrant Rights Centre Ireland claims that Supermac’s pre-tax profits quadrupled in 2009. In the UK, McDonald’s reported its strongest ever year there and a seven per cent increase in worldwide profits in 2008. While Fianna Fáil seems currently supportive of retaining the Joint Labour Committees, Fine Gael has exhibited more explicitly neo-liberal attitudes to minimum wages and employment regulation. The future of minimum wages may depend, then, on the forthcoming legal challenge by fast food employers and, perhaps more importantly, on whether Fine Gael will form part of the next government. Employers’ ability to attack the minimum wage is facilitated by the lack of a workplace-level voice for workers. Accommodation and food services has the lowest unionisation level in the country (6 per cent in 2009), which, in itself, could be viewed as a symptom of neo-liberally led political institutions.

However, even where their workplace voice is strong and the unions have used their collective strength to protect the pay of members (as in the public sector, for example), they are criticised for potentially damaging Ireland’s reputation internationally. The backlash against union action has also come from private sector workers, illustrating the success of the current political class in dividing the working class, so that workers are pitted against each other. Worryingly for strong unions in social democratic countries, seemingly successful industrial action against a race to the bottom has been challenged by employers and the ECJ. The ECJ has taken a legally narrow view of industrial action, which it has determined cannot be taken at a unions’ discretion but must be assessed relative to capital-friendly ‘freedoms.’ This legally narrow view of unions’ activities and role was not confined to the ECJ. In the 2007 Ryanair case, the Irish Supreme Court contravened International Labour Organisation Conventions by deciding that collective bargaining did not have to involve trade unions or an excepted body (a body that negotiates pay and conditions on behalf of its own employees/members but does not need a negotiating license) and that an employer’s right to operate a non-union company could not be encroached upon.

In Ireland, it has been argued that unions were protected by their special status at national level in participating in social partnership – an alternative argument is that the system of social partnership was a facade for a neo-liberal economy, in which the government’s apparent support for a role for unions masked the practice of pursuing pro-business public policies. There were some gains for unions under social partnership, however, its current collapse; the declining power of unions in the private sector; the continuing imbalance of power in favour of globalised capital; and unfavourable political and legal institutions, combined with the economic crisis, mean that workers will find it increasingly difficult to resist a decline in their wages and conditions.

Michelle O’Sullivan is a lecturer in Industrial Relations at the University of Limerick.

Copyright © The Citizen and the contributors, 2010