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Pay Prospects For 2023 - Preliminary Guidance

Stratis Consulting has received numerous requests from clients to set out our views on likely developments in pay for 2023. While much uncertainty remains about the precise economic conditions that will obtain in 2023 we are setting out a preliminary guidance which we will likely update in December based on conditions at that time.

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 will combine to inform pay prospects for 2023.

Labour Market Tightness Expected To Continue

Practically every employer can bear witness to the tightness in our labour market. The rate of unemployment at 4.3% in September speaks to the pressures being felt to attract and retain staff. On the upside we now have some 2.55 million people in employment in Q2,2022, which is almost 200,000 more than in 2019.

Most analysts are predicting that the annual average unemployment rate will stay under 5% for the year as a whole, while job vacancy rates will remain high despite a moderation in labour demand over more recent months. In looking at key cohorts, the numbers show continuing improvements in youth employment, female employment and indeed older workers remaining employed:

  • The female unemployment rate in August was 4.3%.

  • In looking at youth unemployment, for persons aged 15-24 years, the rate is 12.4% slightly up from a rate of 11.8 % in August 2022.

  • Finally, for those aged 25-74 years of age the rate is down to 2.9%.

The tightening of the labour market has been compounded by the departure of many non-Irish nationals during Covid. Their return, amongst others, as part of Irelands ‘brain gain’ in large numbers is being severely impacted by cost of living, housing and for some, childcare costs. It seems that a lack of labour availability will be with us for some time and is reflective of the experience of many other countries as they emerge from the pandemic.

The evidence can be seen in our daily lives, from the cafes or restaurants unable to open early in the week to other ‘opportunity cost’ issues for other businesses who are seriously re-evaluating their plans for investment or expansion as a result. Organisations are having to either look to technology, new talent pools or creative new ways to better align to employee expectations to attract, and retain, talent.

Inflation Has Been A Moving Target

The Department of Finance has increased its outlook for inflation to an average of 8.5% for 2022, peaking at 10.4% towards the end of this year. It forecasts that inflation will remain high into next year, averaging 7.1% for 2023 and returning to more normal levels of c2.4% in 2024.

The ESRI Quarterly Economic Commentary (Autumn 2022) says “Inflationary pressures are however, set to continue with some moderation in the inflation rate expected in 2023. We now forecast inflation of 8.1 per cent in 2022 and 6.8 per cent in 2023.”

The latest Central Bank Quarterly Bulletin (Q4, 2022) is predicting an inflation rate of 6.3% for 2023 moderating to 2.8% in 2024.

Meanwhile the IMF has revised up its 2022 forecasts for several countries, including Ireland, and has forecast that inflation in Ireland will be an average of 8.4% for 2022 moderating to 6.5% in 2023 with unemployment staying near historic lows of below 5%.

The annual inflation rate in Ireland fell to 8.2% in September of 2022, down from 8.7% in August and extending the decline from the peak of 9.1% in June, as energy prices retreat.

Predicting the expected level of inflation has been a real challenge, but what we can say is that inflation will be higher than expected for longer and will feed into pay demands and expectations for 2023.

Pay 2022 – Avoiding A Pay/Inflation Spiral

As the rate of inflation accelerated in Q1 2022 pressure on the 2.5% ‘norm’ was evident with pay deals which arrived through collective bargaining quickly shifting into the 3.0-3.5% arena (annualised cost). The further acceleration in inflation in Q2 has led to a number of developments:

  1. New pay settlements in H2, 2022 through collective bargaining are trending towards the 3.5-4.0% arena (annualised cost).

  2. Some employers have made unilateral ‘economic adjustments’ either in the form of once off lump sum payments or ongoing increases in part recognition of the ‘cost of living’ issues for workers.

  3. Unions are contacting employers to seek a review of existing pay agreements prior to their expiry dates. We should stress the incidence of this is not significant and the integrity of existing agreements are being respected.

  4. Some employers have had to make pay adjustments to attract and retain staff, particularly if they are operating marginally above the Minimum Wage or even the Living Wage. The Minimum Wage will increase by c 7.5% to €11.30 per hour from the 1st January 2023 and we await final Government proposals for the likely adoption of a Living Wage.

  5. In the unionised private sector, worryingly we have seen a rejection of a small number of recent Labour Court Recommendations on pay. This has led to further engagements by the parties and to industrial action in a few instances. In these cases, final settlements were in excess of the original terms of the Labour Court Recommendation.

  6. Agreement has also been reached on a revision to the public sector pay agreement ‘Building Momentum’ which provides for a 6.5% pay increase, over 2022 and 2023, on top of the already agreed 2% in pay increases for 2022, resulting in a 8.5% adjustment over the two years.

  7. According to findings from the new IRN-CIPD Pay and Employment Practices Survey, private sector pay increased over the last year by an average of 4.64% per annum and a median of 3.5%, with expectations for 2023 being in the 3-4% range.

In summary, pay settlements in the private sector have been increasing over the course of 2022. Settlements in H1 which were in the 2.5-3.5% range have moved into the 3.5-4.0% range over H2. Despite this gradual increase, the general range of settlements remain well short of the predicted inflation rate for 2022 as a whole.

Budget 2023 - Helping To Maintain The ‘Below Inflation’ Trend

There was intense pressure on Government to provide additional reliefs to workers via Budget 2023. For those in employment, this has occurred in the form of changes to personal tax rates/reliefs and as part of a suite of measures the standard rate cut-off point has been increased to €40,000. Tax credits for personal employee and earned income credit will increase by €75. Domestic electricity customers will also get €600 credit to help reduce electricity bills. (The credit will be paid in 3 instalments of €200 each in November 2022, in January 2023 & in March 2023.)

In terms of childcare costs, the hourly subsidy paid per child to childcare providers under the National Childcare Scheme will almost treble from €0.50 to €1.40, to a maximum of 45 hours. The Government expects this will bring down the annual cost to parents by 25%, an average of €1,200 and a maximum of €2,100.

Free schoolbooks for all primary school pupils will be provided from September 2023 benefiting more than 500,000 pupils.

Improvements have also been made to the Small Benefits Exemption scheme under Budget 2023 with the ceiling being increased from €500 to €1,000. Eligible employers, subject to this new higher limit, can give two vouchers, or gifts, to their employees each tax year and these changes are applicable for the 2022 tax year.

The assistance provided by Government in the form of once off payments has certainly helped to maintain this ‘ below inflation’ trend for 2022 and there will be further pressure to maintain such supports into 2023 as compensating for inflation in the current environment cannot be the sole responsibility of employers and Unions via collective bargaining.

Pay Prospects For 2023

While employers have not generally been pressurised to match inflation in 2022, we would expect that this pressure will intensify as we move into 2023. Trade unions are more likely to seek greater inflation proofing into 2023 as one of their core tenets is to protect the living standards of their members.

Likely developments on pay in the private sector for 2023 include:

1. The general level of pay increases is less likely to be concentrated around a norm compared to recent years and will more likely be within a wider range of c 3-4.5.%, with sector variations, before moderating into 2024. Some employers who continue to face competitiveness challenges, particularly across certain domestic sectors, may be faced with an inability to pay any wage increase.

2. Pay increases may be tiered to earnings to address the greater inflation impact for lower paid categories, e.g.

a. X% on first 30,000

b. Y% on 30,001 – 50,000

c. Z% on > 50,001

3. Pay increases may also be expressed in monetary amounts to provide higher increases to lower paid workers.

4. Lump sum or non-consolidated payments may be used to avoid embedding or consolidating pay increases. (This may include recourse to the higher limits available under the Small Benefits Exemption scheme)

5. There will be a higher incidence of review clauses based on what happens with inflation in 2023/24.

6. In the context of higher pay expectations, pay outcomes may only be sustainable for an employer where they are accompanied with suitable changes in work practices and/or significant improvements in labour productivity to justify those outcomes which may be above and beyond commitments on ‘normal ongoing change’.

7. Government will face pressure to provide further supports and reliefs to workers into 2023 to alleviate pressure on employers to match ‘cost of living’.

8. Employers who are looking to conclude pay deals for 2023 and 2024 will need to ensure that the expected moderation of inflation is fully accounted for.

Employers will have to carefully reflect on their pay positioning for 2023, and beyond, based on a range of factors including, profitability, the impact on local site competitiveness, the capacity to pass on cost increases in the marketplace, external equity issues, the employer’s promise on remuneration to their employees, the capacity to attract and retain staff, pay developments generally in comparator/reference sites in the sector, regionally and nationally, Labour Court Recommendations on pay and finally the general level of settlements within other key EU Member States.

This may require a level of agility in the normal timing of any final decision on pay/reward strategies for 2023 to deliver sustainable outcomes and to ensure that all factors are fully captured. We always encourage employers to be mindful of the wider impact of any final decisions on pay to avoid creating a headline increase that could be used against other employers.

Organisations must also ensure that communications and feedback processes are effective to ensure there is a full understanding of both the concerns of staff and the rationale for any proposed wage increases by management.

Finally, given the challenge in making any economic predictions at present Stratis Consulting may issue an updated guidance note in December 2022.

If you would like to talk to us about any of the above issues, please get in touch.

Liam Doherty PhD | Senior Partner and Brendan McGinty | Managing Partner

Stratis Consulting

‘Strategic Employment Relations’

T: +353 (0) 1 2936748 M: +353 (0) 87 2236476

T: +353 (0) 1 2166302 M: +353 (0) 87 2433038

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.

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