Is Some Moderation of Pay Trends in Prospect? – Stratis Interim Review
As we approach Q4 2023, we thought it would be interesting to take stock of pay developments for the current year.
In December 2022, amidst much uncertainty about the precise economic conditions that will obtain in 2023 our guidance has largely been borne out, over H1, 2023 with the prospect of some moderation to come.
In summary, we assessed that the ongoing tightness in the labour market, the expectations for continued economic growth, albeit at a lower level than previously projected, the impact of the war in Ukraine, the continuing effects of inflation and the specific market conditions and business challenges faced by individual employers and sectors would inform pay prospects for 2023.
Labour Market Tightness is Still Very Much in Evidence
Despite a rise in the participation rate – now above the pre‑pandemic level – the vacancy rate is above historical averages, indicating real difficulties in filling vacant positions. At the beginning of 2023, the number of people in work was close to record levels and the unemployment rate was at near-historic lows of 4.3%.
Most employers bear witness to this tightness of our labour market. Ireland is now at close to full employment with an unemployment rate of 3.8% (105,400) recorded in June, unchanged from May and down from 4.2% in May 2022. It is now the lowest rate in over two decades. The participation rate at 64.9%, stands 3.5% above the level in Q1 of 2018. This reflects the ongoing pressures being felt to attract and retain staff amidst a reduced pool of available labour. The Bank considers that “a gradual slowdown in job vacancies and employment growth, moderate improvements in productivity alongside a lower inflation rate, are expected to curb the potential for wage-price pressures with unemployment remaining low.” The most recent SOLAS Difficult to fill Vacancies data (April 2023) show that it is particularly difficult to find workers for science, engineering and technology, health & social care and for construction occupations.
Despite news of some “big tech” companies reducing their staff worldwide in autumn, this has had a limited impact in Ireland (c.2500 jobs) where the tech sector increased employment by 29% since 2019 and the multinational sector increased employment in 2022 by 9%. On the upside the number of people employed in the Irish economy increased 4.0% on an annual basis in Q1, 2023 with over 2.6m in employment, even higher than pre pandemic levels.
The latest Central Bank analysis predicts that the annual average unemployment rate will be c. 4% for 2023 and will remain at that level out to 2025 while job vacancy rates remain high.
Signs are that Inflationary Pressures are Easing
The ESRI Quarterly Economic Commentary (Summer 2023) predicted that while inflation is expected to slow in 2023 due to falling energy costs, second round effects may still exert upward momentum on general price levels. They predict inflation (CPI) to be 5.0% in 2023 before easing to 3.0% in 2024 whilst the HICP measure may be lower at 4.3% in 2023 and 2.8% in 2025.
Similarly, the latest Central Bank Quarterly Bulletin (June 2023) is predicting a lower inflation rate of of 5.3% for 2023 moderating to 3.4% in 2024 and 2.7% in 2025 (HICP).
Ibec in its Q2, 2023 Outlook also predicted that inflation by the end of 2023 will fall below 4%, and average about 2.5% in 2024. They expect full year inflation for 2023 to be 4.8% and 2.3% in 2024.
Meanwhile the EU Commission (May 2023) predicted that inflation (HICP) in Ireland is estimated to have peaked at 8.1% in 2022 and is set to moderate gradually throughout 2023 to 4.6% (yoy) and reach 2.6% in 2024 as energy prices ease.
The CSO estimated the annual inflation rate in Ireland has fallen to 4.8% (HICP) or 6.1% (CPI) in June 2023, having been at 8.1% (HICP) and 8.5% (CPI) in February 2023.
The Department of Finance (June 2023) currently projects an average inflation rate of 4.9% for this year; the corresponding figure for core inflation is 4.4% (the headline figure excluding energy and unprocessed food prices). As inflationary pressures ease, real household disposable income is set to recover and this should support consumer spending growth.
Predicting the expected level of inflation remains a challenge, but clearly inflation trends are showing important signs of easing but given previous spikes, it will continue to partly inform pay discussions over the remainder of 2023 and for 2024.
Pay 2023 – Avoiding a Generalised Pay/Inflation Spiral
Over H2, 2022 we saw pay settlements through collective bargaining trending towards the 3.5-4.0% arena (annualised cost). Whilst we have seen some outlier settlements for company specific reasons, the general level of increases in 2023 has tended thus far to span a wider range of c 3.0%-4.5.%, with some sector variations.
Reflective of this trend, the recent CIPD/IRN Private Sector Pay & Practices Survey 2023 showed that for unionised employments the planned basic pay increase is 3.1% for the next 12 months compared to 3.6% for the last 12 months. The full survey results indicated a planned rate of increase by respondents (unionised and non union of 3.6% in the next 12 months.
In summary, it is our Stratis assessment that:
Pay settlement levels should continue to ease over H2 2023 and moderate to lower rates of increase in 2024 in light of the further expected easing of the inflation rate next year. The continuing effects of a tight labour market may act as a drag effect in achieving this moderation.
Employers who are considering the possibilities for longer agreements should factor in the expected reduction in inflation in 2024/2025.
There will be a continued focus by some employers on the use of lump sum or non-consolidated payments which may be needed to reduce the consolidation effect of some base rate increases. This may include recourse to the higher limits of up to €1,000 available under the Small Benefits Exemption scheme.
Importantly, the general range of settlements through collective bargaining have remained well short of the predicted inflation as a whole since inflation rates began to rise sharply. However, we are concerned that some of the collective bargaining practices regarding pay manifested by some UK unions are beginning to appear in our IR system and may create unrealistic expectations that cannot be delivered and which are wholly inappropriate in an Irish context.
Some private sector employers, in a tight labour market, in response to market conditions are making market based pay adjustments to attract and retain staff as the Irish economy is operating at close to full employment. Increases in real wages, particularly for in demand skills or occupations appear to be driven more by these factors than by generalised increases, even where there is collective bargaining.
Employers in the service economy have also had to contend with the Minimum Wage increase of c 7.6% to €11.30 per hour from the 1st January 2023 which is being considered again by Government for adjustment in 2024 following the expected recommendations of the Low Pay Commission for an adjustment of 12.4% or €1.40 per hour to €12.70.The Government is also to phase in the Living Wage over four years between 2023 and 2026 when it will become mandatory. Employers have also had to absorb the introduction of statutory sick pay this year, changes to parental leave and benefits legislation, and will have to contend with a proposal to introduce a pensions auto enrolment scheme amongst others.
Meanwhile, the current public service pay deal, ‘Building Momentum’, expires at the end of 2023 and talks on a successor agreement are to take place shortly and unions will seek that cost-of-living is the main focus in those talks. Early indications are that the public sector unions will also seek that any new deal should include a formula to cover the management of grade, category, or group claims. If this emerges, it would essentially be a return to a two-tier bargaining with a central deal for all with a further provision for some form of local or sector bargaining.
Pay positioning by employers for H2, 2023 and for 2024, will therefore be based on a range of factors including profitability, the impact on local site or business competitiveness, the capacity to pass on cost increases in the marketplace, external and internal equity issues, the capacity to attract and retain staff, pay developments generally, Labour Court Recommendations on pay and the general level of settlements in key EU Member States.
Finally we would always encourage employers to be mindful of the wider impact of any offers they make on other employers in their region, sector and nationally.
If you would like to talk about any of the above issues, please get in touch with any of our Partners.
Brendan McGinty | Managing Partner and Liam Doherty PhD | Senior Partner
‘Strategic Employment Relations’
M: +353 (0) 87 2433038 M+353 (0) 87 2236476 or T: +353 (0) 1 2936748
Disclaimer: The information in this article is for general guidance only and does not constitute legal or specific case advice. The answers to specific situations will vary depending on the circumstances of each case. This is not a substitute for specific professional advice relevant to individual circumstances facing your business.