Employers should use once-off measures to compensate workers for rising prices, a senior economist said yesterday.

Advising against permanent pay increases, Prof Patrick Honohan also questioned the wisdom of locking wages into partnership agreements, such as the Programme for Prosperity and Fairness, in a period of high inflation. A professor at the Economic and Social Research Institute, who works for the World Bank, he said: "The circumstances are different to those which prevailed when those deals were made. We've got to remove the artificial lid on wages."

The major inflationary factor in the Republic, he said, was the 30 per cent decline in the euro's value since its inception last year.

This strongly affected prices because firms imported more goods and services from non-euro states, such as the US and Britain, than they exported into the euro zone.

Rising prices thus reflected higher costs as the return from sales fell, he said.

It was important for employers to compensate workers for rising prices but permanent wage increases would dangerously erode competitiveness if there were a sudden reversal in the euro's value.

"The risk is that you lock into a wage profile that can be immediately undermined by a rising euro."

Prof Honohan added: "I think we're talking about one-off payments. We have to de-link the question of paying for the job and the question of exchange rates."

Stating that lump sum or ex poste payments should be used to compensate workers, he said "more adaptable" measures were needed as distinct from wage rises such as those granted under social partnership. Not doing this would lead to industrial unrest, he said.

Prof Honohan believed the euro's low value did not reflect the fundamental strength of its member economies. He had no comment to make on yesterday's intervention by the European Central Bank to support its value.

Addressing economists at the Institute of European Affairs, he said the most significant driver of growth in the boom was the drop in unemployment, which has fallen below 4 per cent this year from 12 per cent in 1995. This was much more significant than rising productivity.

Other developments such as increased foreign direct investment Prof Honohan regarded as short-term elements in the context of more favourable medium-term developments, such as social partnership, and long-term conditions, such as labour supply.

Stating that a 10 per cent rise in real wages since 1997 was due to effective full-employment, Prof Honohan said the euro's weakness and inflation had little impact on this until now.