Can we expect wage increases in 2022 to offset price increases?

Economists currently differ on whether the pace of the price increases we are seeing is temporary or “transient” as they like to call it.

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

So the rate at which the cost of filling a car with fuel or heating the house increases, for example, is exaggerated by the fact that energy prices have fallen to their lowest level in decades. during the pandemic.

In contrast, this year they have increased steadily and comparing the extremes has amplified what we see in the inflation numbers.

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

The price increases are real

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

Quite simply, running a house or a car costs more this year than it has been for many years.

Therefore, if you have not had a raise, the value of your salary is effectively eroded.

To put it another way, you might need a raise just to stand still.

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

The realization that the cost of living is rising will likely translate into demand for higher wages over time and according to an economic letter from the Central Bank this week, this is already happening.

“An imbalance between supply and demand for services when sectors reopen has contributed to wage pressures in some sectors,” the regulator said in its overview of recent inflation developments in Ireland and the euro area .

Who sees his remuneration increase?

Typically, those in the multinational sector who have ordered good wage increases historically.

According to Brendan McGinty, Managing Partner at Stratis Consulting – a provider of strategic labor relations services – organizations in international trade sectors, which had not been particularly affected by Covid or Brexit, were guiding salary increases of between 2 and 2.5%.

He said companies in the indigenous sector were largely recovering in the midst of the pandemic and had not yet gotten out of the woods and overall were unable to meet wage demands.

“Next year, employers are considering additional costs due to the lump sum compensation. Covid has had a huge impact on businesses, including many struggling SMEs. And the effects of Brexit are still being sailed.”

But the reality is that labor shortages are pervasive throughout the economy and this is driving wage demands in some sectors.

Dr Tom McDonnell, co-director of the Nevin Economic Research Institute – which is supported by a number of unions – points to heavy truck drivers as an area where shortages are driving wage demands in many markets.

The same is true, he said, for construction workers, engineers and those skilled in the field of information and communication technologies, and more recently in traditionally lower paid sectors such as as retail, accommodation and food services.

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

This matches what the recruitment site sees in the job postings on its UK and Irish portals.

Jack Kennedy, an economist at Indeed, said areas experiencing wage growth above the current rate of inflation were the ones currently experiencing the biggest bottlenecks.

“The supply of labor has not kept pace and we are seeing this translate into higher advertised wages in job postings,” he explained.

He said pay rates in areas such as delivery driving were up 9%. Increases of around 8% were proposed in construction, particularly on the UK market.

In software development, advertised compensation levels have increased by approximately 7%.

There was, he said, a growing tendency in some of these industries to offer signing bonuses – such is the demand for staff – which is being seized by workers who take the opportunity to upgrade to a job with a better rate of pay and an initial cash bonus.

Such benefits – and “anti-inflation” salary increases – were, however, largely limited to these areas.

“We don’t see it spreading across the entire labor market. It is very concentrated in sectors experiencing squeeze,” Kennedy added.

Is anyone else looking for a raise?

The Financial Services Union has called for a pay rise for frontline banking staff of more than 6% in light of banks returning to profit as well as the expected return to paying dividends in shares to investors.

It was also, the FSU said, in recognition of the current rate of price increases in the economy.

The Irish Congress of Trade Unions Private Sector Committee will present its review of the scale of the pay increases private sector unions are expected to request on December 13.

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

This year’s decision, he said, will be more complicated than in previous years due to the complexity of inflation and the general economic outlook, which are difficult to predict at the moment.

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

He explained that the unions’ annual wage demand is largely driven by inflation and long-term productivity.

“Adding these two together would give an idea of ​​what to expect.”

Tom McDonnell described the productivity element of the wage claim as being volatile from year to year, but it is generally between 0.7% and 1.5%.

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

Since the inflation outlook for the full year ranges from 2.2% (Finance Department) to 2.9% (Central Bank), unions could aim for a general wage increase of between 3% and around 4.5% for 2022, or even more.

So, can I expect a pay rise?

Employers are likely to resist the push for as long as possible.

They will stick to the line of the European Central Bank that the inflation we see now is transient and will likely decline over time.

The current situation, argues Brendan McGinty, cannot serve as a basis for establishing a benchmark for salary increases.

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

“What we are seeing is a temporary increase in inflationary pressure and all commentators see this as being caused by energy and supply bottlenecks and problems brought about by the nature of the post-Covid recovery. “

“We cannot allow this to be a private sector benchmark for longer term pay increases,” he added.

His argument was reinforced by the views expressed by the governor of the Central Bank this week.

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

“When the evidence changes, we shouldn’t hesitate to change our approach,” he wrote.

Tom McDonnell agrees with the view that a wage-price spiral should not materialize because it would not be in anyone’s best interests.

“It doesn’t benefit workers in the long run. All you do is drive inflation away. It’s about managing workers’ expectations while making sure they don’t see their standard of living. lower, ”he explained. .

However, if inflation got ‘sticky’ and the ECB started to raise interest rates – making it more expensive for people to service their mortgages as well as manage their homes, a clamor of demands for payment from various sectors – public and private – one would expect.

Paying is not the only motivator

One thing employers have going for them is that pay isn’t the only motivator for workers right now.

Since the start 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 wages in attracting workers first and then retaining them for the long term.

While the benefits most sought after by employees remain the traditional categories of health insurance, retirement and paid sick leave, flexible work options are making their way to the employee and employer roster.

“Employers responded and revised their benefit strategies with 1 in 4 confirming that they have changed their benefit offering due to Covid-19. As a result, flexible and hybrid work models are expected to proliferate and are likely to last, ”Trayc Keevans, said Morgan McKinley Ireland’s global IDF director.

Jack Kennedy said that while salary remains the primary motivation for job seekers, flexibility has become a key consideration for many, along with the desire to change career paths.

“There are a whole series of factors. There has been a lot of talk about the ‘Great Resignation’. People are re-evaluating what they expect from work,” he said.

However, he said the phenomenon of mass quits has not really materialized to any great extent except in areas of current high demand where the ability to relocate is prompted by better wages and sometimes even bonuses.

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

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