Can we expect pay hikes next year to offset rising prices?

Economists differ at the moment over whether the pace of price increases that we are seeing is temporary, or ‘transient’ as they like to put it.

Some argue that the rate at which prices are going up is being influenced by the reopening of the economy as the pandemic restrictions are lifted and what we are seeing is largely as a result of what are called ‘base effects’.

So, the rate at which the cost of filling a car with fuel or heating the home is going up, for example, is being exaggerated by the fact that energy prices fell to their lowest level in decades during the pandemic.

In contrast, this year they have risen steadily, and comparing the extremes has magnified what we are seeing in the inflation numbers.

The European Central Bank argues that price rises will settle down next year and that in the long run it may even struggle to hit its target of 2% inflation on an annual basis.

Price rises are real

Economic arguments aside, the fact is that prices are rising with the annual measure of inflation exceeding 5% in October, according to the Central Statistics Office.

Quite simply, it’s more expensive to run a home or car this year than it has been in many years.

Consequently, if you haven’t had a pay rise, the value of your wages is effectively being eroded.

To put it another way, you may need a pay hike just to stand still.

And that’s something that we haven’t had to deal with in Ireland for the best part of a decade. Inflation has been muted, to say the least.

The realisation that the cost of living is rising will likely translate into a demand for wage increases over time and according to an economic letter from the Central Bank this week, it’s already happening.

“An imbalance in supply and demand for services as sectors reopened has contributed to wage pressures in certain sectors,” the regulator stated in its Overview of Recent Inflation Developments in Ireland and the Euro Area.

Who is seeing their pay rising?

Typically, those in the multinational sector who have commanded good pay increases historically.

According to Brendan McGinty, Managing Partner at Stratis Consulting – a provider of strategic employment relations services – organisations in the internationally traded sectors, that had not been particularly badly impacted by Covid or Brexit, were guiding pay rises of between 2 and 2.5%.

He said companies in the indigenous sector were largely getting back on their feet amid the pandemic and were not out of the woods yet and, on the whole, were not in a position to meet wage demands.

“Next year employers are looking at added costs because of statutory stick pay. Covid has had a massive impact on businesses, including many SMEs that are struggling. And Brexit effects are still being navigated.”

But the reality is that labour shortages are widespread across the economy and that’s driving pay demands in certain sectors.

Dr Tom McDonnell, Co-Director of the Nevin Economic Research Institute – which is supported by a number of trade unions – points to HGV (heavy goods vehicle) drivers as an area where shortages are driving wage demands in many markets.

The same is true, he said, for construction workers, engineers, and qualified individuals in the area of Information and Communication Technology, and more recently in traditionally lower paid sectors such as retail, accommodation, and food.

“The reality is that employers may have to just bite the bullet and start paying higher wages,” he said.

That’s consistent with what the recruitment website Indeed.com is seeing in job postings across its UK and Irish portals.

Jack Kennedy, economist with Indeed, said the areas seeing pay growth in excess of the current rate of inflation were those experiencing the biggest bottlenecks at the moment.

“The labour supply hasn’t kept pace and we’re seeing that translating into higher advertised wages in job postings,” he explained.

He said pay rates in areas like delivery driving were up 9%. Increases of the order of 8% were being offered in construction – particularly in the UK market.

In the area of software development, advertised pay levels were up around 7%.

There was, he said, a growing trend in some of those sectors to offering signing bonuses – such is the demand for staff – which is being seized upon by workers who are taking advantage of the opportunity to move to a job with a better rate of pay and an up-front cash bonus.

Such perks – and ‘inflation-busting’ pay increases – were, however, largely confined to those areas.

“We’re not seeing it broaden out across the labour market. It’s very much concentrated in those sectors experiencing the squeeze,” Mr Kennedy added.

Is anyone else seeking a pay increase?

The Financial Services Union has called for a pay increase for frontline banking staff of in excess of 6% in light of the banks returning to profit as well as the expected return to payment of share dividends to investors.

It was also, the FSU said, in recognition of the pace of price increases across the economy at the moment.

The Private Sector Committee of the Irish Congress of Trade Unions will present its consideration on the magnitude of pay increases that private sector unions should be seeking on December 13th.

Tom McDonnell will be among those presenting various scenarios to the committee as it deliberates on the matter.

The decision this year, he said, will be more complicated than in previous years because of the complexity of the inflation and general economic outlook, which is difficult to forecast right now.

“The big thing that unions will have to come to a view on is do they think inflation is a temporary spike and if it’s going to fall back to the longer-term average, or are we looking at something more sustained,” he said.

He explained that the annual pay claim from unions is dictated broadly by inflation and long-term productivity.

“Adding those two together would give a ballpark of what to expect.”

Tom McDonnell described the productivity element of the pay claim as being volatile from year to year, but it broadly falls between 0.7% and 1.5%.

“The big issue is inflation and inflation for consumers in particular,” he said.

Given that the outlook for inflation for the full year ranges from 2.2% (Department of Finance) to 2.9% (Central Bank), the unions could be seeking a general pay rise of between 3% and around 4.5% for 2022, possibly higher.

So, can I expect a pay rise?

Employers will likely resist the push for as long as possible.

They will stick to the European Central Bank line that the inflation we’re seeing at the moment is transitory and will likely abate over time.

The current situation, Brendan McGinty argues, cannot be the basis for setting a benchmark for pay rises.

He said there was a danger that if pay demands were granted on the basis of an inflation spike, the economy would be in danger of falling into a wage-price spiral.

“What we’re seeing is a spike in temporary inflation pressure and all the commentators see that as being caused by energy and supply bottlenecks and matters brought about by the nature of the recovery post-Covid.”

“We can’t allow that to be a private sector benchmark for longer term pay rises,” he added.

His argument was bolstered by the views expressed by the Governor of the Central Bank this week.

While acknowledging that regulators should act if the situation warranted it, Gabriel Makhlouf said an immediate response was not warranted.

“When the evidence changes, we should not hesitate to change our approach,” he wrote.

Tom McDonnell agrees with the view that a wage-price spiral should not materialise as it would not be in anyone’s interest.

“That doesn’t benefit workers in the long run. All you’re doing is chasing inflation. It’s about managing expectations on the worker side while at the same time ensuring that they don’t see their standard of living fall,” he explained.

However, if inflation does become ‘sticky’ and if the ECB were to start hiking interest rates – making it more expensive for people to service their mortgages as well as running their homes, a clamour of pay claims from various sectors – public and private – could be expected.

Pay not the only motivator

One thing that employers have going in their favour is that pay is not the sole motivator for workers at the moment.

Since the onset of the pandemic, the focus has shifted to other benefits, such as flexible working arrangements and the ability to work remotely.

According to a recent study by professional services recruiter, Morgan McKinley, benefits can be as important as competitive salaries in firstly attracting workers and then retaining them in the long run.

While the benefits most desired by employees are still the traditional categories of health insurance, pensions and paid sick leave, flexible working options are making their way up the list for employees and employers alike.

“Employers have responded and revised their benefit strategies with 1 out of 4 confirming that they have amended their benefits offering because of Covid-19. As a result, flexible and hybrid work models are anticipated to proliferate and are likely to endure,” Trayc Keevans, Global FDI Director of Morgan McKinley Ireland said.

Jack Kennedy said while pay is still the top motivator for job seekers, flexibility has become a key consideration for many, as well as a desire to change careers path.

“There’s quite a range of factors. There’s been a lot of talk about the ‘Great Resignation’. People are reassessing what they want from work,” he explained.

However, he said the phenomenon of people resigning en masse had not really materialised to any great extent, apart from in those areas of current high demand where the option to move is being incentivised by better pay and sometimes even bonuses.

“Job to job moves are about where we would expect them to be given the current level of vacancies,” he said.

Article Source – Can we expect pay hikes next year to offset rising prices? – RTE – Brian Finn

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