Employers Should Reign in Escalating Pay Costs

Labour costs are a key factor in determining competitiveness. After years of moderate growth, labour costs have started to increase at a much faster rate than in previous years. It should be a shared challenge for Government, employers and trade unions to ensure that the interaction between wages, prices and productivity levels is sustainable and enhances both competitiveness and living standards.

Consumer prices have remained at low levels in Ireland for the past nine years with the overall cost of living still the same as it was in 2008. Inflation picked up in 2018 to 0.7% (HICP) and for 2019 the average inflation rate was 1.1% (HICP). Forecasted inflation (HICP) for 2020 will still only be about 1.1% and current nominal wage increases are continuing to grow at a much faster rate than inflation as households benefit from rising real income.

The CSO Earnings and Labour Costs Quarterly Survey reported an annual increase in average earnings for Q4, 2019 of 3.5% higher than in the same period the previous year. In the five years to Q4 2019 average weekly earnings rose by 11.6%. This has been mainly due to the upward pressure on wages due to improved employment levels and a tightening of labour supply. The largest increases were recorded in the accommodation and food service activities sector and in the information and communication sector over the year.

In terms of collectively bargained base pay increases, settlements in 2019 (depending on the sector) ranged from 2.0% to 2.75% with an average of c. 2.5% ,and a very small number of agreements toward year end recording settlements which were a little higher where there was an exceptional reason such as significant change agreed in return, or ‘catch-up’ from relatively low pay rates.

Whilst the full impact on trading and economic conditions for some sectors, which may be most impacted by the spread of the ‘coronavirus’ are unknown, at Stratis we expect the 2019 pattern in unionised employments to be repeated in 2020. With labour shortages increasingly a challenge, we expect most firms to increase base pay by an average of c. 2.5%, save for sectors such as agri-food hospitality and retail which are most exposed to Brexit and for those in sectors such as in transport, tourism and hospitality where the threat of a coronavirus outbreak could have a very serious impact for 2020.

Overall with growing uncertainties in the trading environment, employers are more aware of the need to reign in escalating pay costs. There is some indication of an increased interest in agreements of a shorter duration which reflects a growing level of uncertainty about the competitive and trading environment for business, yet premium adjustments are still evident in some sectors such as in Finance and ICT driven by skill supply issues.

For 2020, the Congress of trade unions has advised unions in the private sector to seek baseline pay increases of between 3.5 and 4.5% in 2020. Unions are focused on seeking pay improvements for members through local bargaining in light of cost pressures associated with housing, transport and childcare, and it is also noticeable that issues of flexible working and family friendly policies are also coming to the fore. At Stratis we believe that there is no justification for this level of pay claim as it sets expectations at unrealistic levels.

Many employers are applying market-based reward models, allowing for sustainable progression and encouraging a performance culture. However, employers need to be mindful of divergent union attitudes that exist on market-based pay amidst concerns about transparency and fears of a potential impact on their collective bargaining role.

In prioritising issues for 2020, employers need to appreciate the difference between building confidence in ‘fair pay’ (by ensuring any employee’s actual pay is within their own predicted range given their role, location, performance etc and the pay of their peers) and in dealing with issues of ‘gender pay’ which we expect will be a bigger issue in 2020 for Irish business (which is about confirming any difference in average pay for men and women in the organisation to reflect employee distribution rather than absolute pay levels).

In the current uncertain environment, employers need to be mindful of the wider implications of decisions on pay. Employers need to be more assertive in seeking delivery of existing commitments to full co-operation with change and to draw distinctions between fulfilling those existing agreed commitments which have yet to be delivered and any new areas of flexibility or productivity improvements needed to underpin competitiveness and sustain employment.