Employers Need to Challenge Escalating Pay Costs

In our most recent “Client Update” we provided an update and review of the IR and ER landscape. Over the next few weeks we’ll share our thoughts on some of the key issues.

First up we look at “Employers need to challenge escalating pay costs”.

Over Recent Years…

Over recent years trade unions have persisted with so called ‘pattern bargaining’, where a headline settlement is promoted and is followed by other firms within a sector. Usually this is driven by a strategy of seeking to secure baseline pay deals, without productivity concessions, which they see as appropriate for separate discussion – ‘two tier bargaining’.

Driving Costs…

Employers are now concerned that this unmanaged ‘two tier bargaining’ is driving pay settlements to uncompetitive levels. The National Competitiveness Council reported in April 2019 that, after years of moderate growth, labour costs have increased by about 2.9%, four times faster than average prices.

Without similar increases in labour productivity, this increase in costs will simply put pressure on Irish prices, particularly for essential consumer products like housing and residential rent, and childcare costs. If unchecked, it will also lead over time to Ireland becoming uncompetitive as a location for international investment.

If We’re to Achieve Sustainable Growth & Productivity…

Amidst considerable uncertainty in our trading environment, sustainable growth will depend on our ability to tackle the productivity deficit across many sectors and occupations, and especially in the indigenous and locally-trading sectors. Irish labour productivity growth is skewed by a small number of firms mainly in the manufacturing and ICT sectors.

The recent OECD review of SME policy and entrepreneurship in Ireland found that productivity growth among established Irish SMEs, had either flatlined or declined in the past decade for a variety of reasons, including poor skills development, a slower pace of digitisation and/or a lack of “internationalisation”.

Increasingly, small firms should be encouraged to invest in various forms of workplace innovation as part of their effort to boost productivity levels at enterprise level. Consumer prices have remained at low levels with inflation for 2017 and 2018 having been just 0.4% and 0.5% respectively. Yet compensation per employee in 2018 increased by 2.7%. Whilst we have seen some upward pressure on prices due to Vat changes in the hospitality sector and increases in utilities and housing costs, CSO data show that prices rose by just 0.9% in the year to September 2019 (CPI) or by 0.6% using the HICP measure. The Central Bank (see Q4, Bulletin 2019) has predicted that ‘compensation per employee’ 1 could increase by up to 3.6% in 2019 and 3.5% in 2020.

Pay Adjustments in 2020

There is little cost of living justification for pay increases as the rising cost of services has generally been offset by lower goods prices and the average full-time worker is now earning about 8% more than they did in 2008.

Despite trade risks which pose a threat to the labour market and employment and recognising a continuing tightness in the labour market, it is our assessment that most employers still expect to provide pay adjustments in 2020 but within an indicative settlement range of 2.0-2.75%.

Any adjustments beyond this level must be strictly by exception. However, we do foresee significant sector differences and with deals at the lower end of this spectrum being more likely where there are Brexit concerns e.g. in the agri-food sector. Primary agriculture and the food processing sector (agrifood sector) employ around 153,000 people in Ireland, accounting for almost 7% of all jobs. It should be of great concern to businesses that these developments are occurring in the absence of any national guidance or a settled pay policy.

In this context, Stratis is reminding employers that they remain entitled to seek cost offsetting measures in return for any basic rate increases. We would also encourage employers to consider the wider implications of any pay agreements they are concluding for employers in their Sector, Region and Nationally.

About Stratis Consulting

Stratis Consulting operates directly at Leadership Team, Chief Executive and Board levels to support organisations who want to inspire, lead and drive change in the areas of ‘Employee Relations, People Strategy and Workplace Innovation’. To learn more about us, or to arrange a consultation please contact our team in complete confidence, at info@stratis.ie or call 01-2166302.