The Phillips Curve and the Wage-Inflation Process in Ireland

National Wage Agreements (NWA’s) between the social partners (government, trade unions and employer representatives) were re-introduced in Ireland in January 1988 and, while there is debate or controversy on the issue, have been widely credited as being a significant factor underlining the economic prosperity of the 1990’s and 2000’s (Barry (2009), Fitz Gerald (1999), O’Leary (2006)).  By 2008, there were seven agreements in total spanning a twenty-one year period.  This paper is concerned with examining the various wage agreements in order to get an insight into the wage, inflation process in Ireland and establish the extent to which domestic factors influence the inflation rate in Ireland.  The outline of the paper is as follows:  in Section 1 a new, monthly, nominal “pay award index”, for both the public and private sectors, based on the wage agreements is constructed.   This index indicates how a worker would have fared if his or her salary was wholly determined by the pay awards over the period.   The pay award index is then compared to the wage indexes published by the Central Statistics Office (CSO) in order to establish whether the wage agreements acted as a constraint on pay developments in the wider economy.
Section 2 provides a brief account of the evolution of the Phillips curve theory and outlines both the New Keynesian Phillips Curve (NKPC) and the Triangle Phillips Curve (TPC) models.  The NKPC model is based on forward-looking inflation expectations whereas the TPC model emphasises inertia and persistence effects and allows for supply-side shocks.  These two models are used in Section 4 to empirically estimate the wage process in Ireland. 
Section 3 contains a descriptive analysis of the inter-relationship between the pay award indexes and CPI inflation over the twenty-one year period.  What emerges is a familiar Phillips curve story of falling unemployment and unexpected inflation provoking a wage, inflation spiral.  Despite membership of a monetary union and allowing for movements in the euro exchange rate,  the long-run effect is a significant deterioration in price competitiveness.  This puts the Irish economy in a very vulnerable position following the 2008 recession.    
Section 4 formally investigates some of the issues raised in Section 3 by estimating both the NKPC and the TPC models using the pay award index as the dependent variable.  The TPC model appears to out-perform the NKPC model as variables representing inertia and persistence effects are found to be important in explaining nominal wages.  The level and rate of change in unemployment, income tax rates, real interest rates and historical real earnings are also found to be have a significant influence on nominal wages.
The final concluding section summarizes the main findings and briefly discusses the implication for restoring Ireland’s competitiveness.