Wage Determination in Economies in Transition: Ireland, Spain and Portugal

This paper considers the experience of three existing member states and how the process of convergence has affected, and in turn been affected by, the performance of their labour markets. It concentrates on the process of wage determination in three countries Ireland, Spain and Portugal. In the case of Ireland, while EU membership occurred in 1973, the process of transition began around 1960 and has continued over a protracted period of forty years. For Portugal and Spain the process has been more concentrated. Liberalisation and democratisation of their economies took place in the 1970s and EU membership occurred in 1986. The changes that took place in these societies affected the labour market both directly and indirectly. In this paper we consider how the process of transition, including freeing of trade and EU membership, has affected both the demand for labour and the supply of labour. In the case of labour supply the role of trade unions has changed, with direct implications for the wage bargaining process itself. EU membership has also opened up the possibility of migration affecting labour supply. On the demand side, membership of the EU and the completion of the Single Market have changed the focus for many of the firms operating in these previously rather closed economies. Today firms producing tradable goods and services are competing in a global market and this has important implications for the factors driving their demand for labour. In Section 2 of this paper we examine the movement of wage rates over the period of convergence. In Section 3 we set out models of wage determination that allow for new effects on wage determination arising from the EU integration process. Section 4 describes the results obtained from estimating these models using data for Ireland, Spain and Portugal. Conclusions are discussed in Section 5.